Next, let’s look at what is
SHAREHOLDERS’ WEALTH MAXIMIZATION:
- Shareholders’ wealth is regarding the maximizing of the total market /market price of the existing shareholders’ common stock
- It can be achieved by considering many factors whether short or long term pertaining to decisions/actions made affecting the present and future earnings per share, timing of returns, dividend policy and other factors that can affect the market price of the company stock
Unlike profit maximization, it has the following advantages:
- Its applies to the principle of time value of money wherein a dollar received today is worth more han it is to be received say 1 year later. By considering time value of money, this will lead to an overall increase in the company’s earning
- To achieve shareholder’s wealth maximization, management needs to consider the uncertainty or risk factor. It accept a certain degree of risk when it is compensated with the same level of return
- Increase in shareholders’ wealth will directly lead to increase in cash flows. It is not concern only with accounting earnings/profits but CASH FLOWS.
- To achieve shareholders’ wealth maximization, the firm has to achieve all the short-term target like sales/earnings growth and dividend payout targets. Only when these short term targets being achieved, the firm will then be attractive to the potential investors which might raise the stock price..