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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
September 6, 2016
Fin Man
Financial management should include not only a concern for profit maximization but
also for maximization of societal value.
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