The View That Shareholder Wealth Maximization Should Always Be the Preferred Objective of a Firm.

Topics: Stock market, Stock, Economics Pages: 7 (2374 words) Published: March 3, 2013

A financial management system is the methodology and software that an organization uses to oversee and govern its income, expenses, and assets with the objective of maximizing profits and ensuring sustainability. It is concerned with the procurement and use of funds with an aim to use business funds in such a way that the firm’s value and earnings are maximized. It also provides a frame work for selecting a proper course of action and deciding a viable commercial strategy which helps to maximize the owner’s economic welfare. Financial management Concerns the acquisition, financing, and management of assets with some overall goal in mind. Assets that can no longer be economically justified may need to be reduced, eliminated, or replaced. It requires the existence of some objective or goal, because judgment as to whether or not a financial decision is efficient must be made in light of some standard. Although various objectives are possible, we assume that the goal of the firm is to maximize the wealth of the firm’s present owners. Shares of common stock give evidence of ownership in a corporation. Shareholder wealth is represented by the market price per share of the firm’s common stock, which, in turn, is a reflection of the firm’s investment, financing, and asset management decisions. The idea is that the success of a business decision should be judged by the effect that it ultimately has on share price. Frequently, profit maximization is offered as the proper objective of the firm. However, under this goal a manager could continue to show profit increases by merely issuing stock and using the proceeds to invest in Treasury bills. For most firms, this would result in a decrease in each owner’s share of profits – that is, earnings per share would fall. Maximizing earnings per share, therefore, is often advocated as an improved version of profit maximization.

A shareholder is any person, company, or other institutions that owns at least one share in a company, also called “stockholder”. They have the potential to profit if the company does well, but that comes with the potential to lose if the company does poorly.

Shareholder wealth maximization is the idea behind trying to drive a stock’s price up. The shareholders are the actual owners of the company, so by driving the price up the company become’s worth more than just the value of its assets. The sum becomes greater than the value of its parts, it therefore becomes worth more to keep the business running than it would be to sell off the parts. The shareholder invests money in a business expecting some kind of economic return. Returns have two flavours: dividends and increasing share prices. In order to pay dividends the company must generate cash. The company’s ability to generate cash can be expressed by the financial figures EBITDA (earnings before interest, tax, depreciation and amortization) and EPS (earnings per share). In order to have share prices increase the company must invest money in cash generating assets and activities like new production plants, product development or marketing activities. Value is only created when the benefits of the investments is bigger than the costs of the investments. If a shareholder invests her money in a company and gains no return, the money is better invested elsewhere. The more money you invest, the higher value the more cash generated, the higher share prices, payouts of dividends and higher shareholders’ value. Thus the maximization matter is actually a question of competing for the investors’ money. Wealth maximization of the shareholder is the appropriate objective of an enterprise this is because it is a long term benefit compared to the other objectives, when the firm maximizes the shareholder’s wealth, the individual shareholder can use this wealth to maximize his individual utility, meaning that by maximizing...
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