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Mara Alessandra I.

Tuason

September 6, 2016

Fin Man
The primary role of financial management is to maximize shareholder wealth.

Traditionally, businesses are driven by profit-oriented goals. However, the new approach
on financial management now focuses on maximizing shareholders wealth. This means
that all financial decisions should be taken in such a way that the shareholders receive
highest combination of dividends and increase in the market price of shares. This
concept is also known as Value Maximization or Net Present Worth Maximization (Patil,
2013).
Shareholders' wealth is maximized when a decision made generates net present value.
The net present value is the difference between present value of the benefits of a
project and present value of its costs. A decision that has a positive net present value
creates wealth for shareholders and a decision that has a negative net present value
destroys wealth of shareholders.
Some advantages of focusing on wealth maximization are (1) increased returns, (2)
strategic consistency and (3) promote objectivity and precision in analyzing and
making financial decisions.
Increased returns. Although companies keep in mind that all decisions should be
profitable, wealth maximization provides an efficient allocation of resource as it is based
on cash flows. Unlike profits, cash flows are exact and definite, thus avoid ambiguity
associated with accounting profits.

Strategic Consistency. Having a clear focus on an overall strategic objective will help
companies create consistency in business decisions.
Promote objectivity and precision. The wealth maximization criterion considers the
risk and uncertainty factor while considering the discounting rate which reflects both
time and risk. It also considers the time value of money, where cash flows are
discounted at an appropriate discount rate, thus being able to represent their present
value.

Sources:

H.

(2016).

Wealth

Maximization.

Retrieved

September

5,

2016,

from

https://www.efinancemanagement.com/financial-management/wealth-maximization

S, S., Says, G., Says, I., Says, S., & Says, M. (2016). Difference Between Profit
Maximization and Wealth Maximization (with Comparison Chart) - Key Differences.
Retrieved September 5, 2016, from http://keydifferences.com/difference-betweenprofit-maximization-and-wealth-maximization.html

Kokemuller, S. B. (n.d.). The Advantages of the Maximization of Shareholder Wealth.


Retrieved September 5, 2016, from http://yourbusiness.azcentral.com/advantagesmaximization-shareholder-wealth-28752.html

@. (2014). What Shareholder Value is Really About. Retrieved September 6, 2016,


from https://hbr.org/2011/10/ceos-must-understand-what-crea

Mara Alessandra I. Tuason

September 6, 2016

Fin Man
Financial management should include not only a concern for profit maximization but
also for maximization of societal value.

Financial objectives and social responsibility bearing exists in contradiction to each


other. Firms having the top objective of profit maximization often forget their social
responsibility in increasing the societys welfare. Why? Many firms believe that bearing
social responsibility and increasing societys welfare will just entail cost and expenses,
thus, decreasing profit and stockholders wealth. For example, firms who give attention
to pollution prevention, product safety or focus on the health of its customers will
definitely have their expenditures increase compared to those firms who just do
business for the sake of earning profit. However, firms tend to forget that this increase in
expenditures is just in the short term because in the long run, bearing social
responsibility will impact on the overall value of the firm. Such will be helpful in setting
up a good image for the company, enhancing consciousness of product quality, and
promoting product brand that will impact on the firms wealth increase.
For stakeholders in the company, firms who work on improving working conditions and
developing welfare safeguard measures will likewise, increase company expenditures
but in the long run, it will be helpful in attracting talents or improving the enthusiasm of
workers. Thus, would translate to productivity as it would translate to the overall
performance of the company.
Basically, firms should not take the social responsibility as a burden, but as an
investment to achieving a positive value of the firm to its stakeholders in the long run.

Firms should pursue in striking a balance between their own financial management
objectives and their social responsibilities under the premise of complying with the laws
and social ethics.
Sources:

Li, M. Xiaoyu, C. (n.d). The Balance of the Social Responsibility and the Financial
Management Goal of the Enterprise. Retrieved September 5, 2016, from
https://www.seiofbluemountain.com/upload/product/201111/2011kxjxid5.pdf