ARELLANO UNIVERSITY

Andres Bonifacio Campus

Pag asa st., Caniogan Pasig City

HANDOUTS NO.3
LESSON 01:
WEALTH MAXIMIZATION

WEALTH MAXIMIZATION

According to Cayanan A. (2017), wealth maximization is a process of increasing the value

of a business in order to increase the value to shares held by its stock holders. If the value of stock
holders’ shares increased, Profits can be recognized. However if the value of stock holders’ shares
are decreased, Losses can be determined. Note: Profits and losses are only recognized once you
sold the shares to other investors.

Wealth maximization can be possible through searching for the investments with highest
possible returns. If the financial manager of the company was able to invest the funds effectively
wealth maximization awaits the company.

The most direct evidence of wealth maximization is the changes in price of shares.
And as a future Financial manager, it is important that you are aware on how profits and
losses can be recognized.

PROFITS AND LOSS PER SHARE:

EXAMPLE 01

On January 01 2022, PINILI Company buys shares of INIWAN Company at Php. 1500
Per share. On December 30 2022, the selling price/value of the shares increased to Php. 2000 Per
share. PINILI sold the shares on December 30 2022.

Q1. What happens to THE VALUE OF THE SHARES bought by PINILI Company PER SHARE?

Formula:
=Selling Price of the Shares- Acquired price of the shares
= 2000.00 – 1500.00
= 500.00

ANSWER: There is an increase of 500 pesos per share. Therefore, there is an

increase in shareholder’s wealth.
Q2. How much was the profit to be recognized PER SHARE if the shares was sold on December
30 2022?

=500 pesos per share.

Note: If it is NOT stated in the problem/question that the shares was sold, the profit/loss to be
recognized is 0. Because profits must be recognized once sold. For the Value of Shares, whether
sold or not, there is an increase/decrease in the value.

EXAMPLE 02

On January 01 2022, SANA Company buys shares of SUSPENDED Company at Php.

1000 Per share. On December 30 2022, the selling price/value of the shares increased to Php. 1200
Per share. SANA Company did not sell the shares on December 30 2022.

Q1. What happens to THE VALUE OF THE SHARES bought by SANA Company PER SHARE?

Formula:
=Selling Price of the Shares- Acquired price of the shares
= 1200.00 – 1000.00
= 200.00

ANSWER: There is an INCREASE of 200 pesos per share. Therefore, there is an

increase in shareholder’s wealth.

Q2. How much was the profit to be recognized PER on December 30 2022?

ANSWER: None. The shares was not sold.

PROFITS AND LOSS ON INVESTMENT:

EXAMPLE 01

On January 01 2022 PAPASA Company buys 10 Shares of KABA Company at Php 1000
Per share.

On December 30 2022 the selling price/ value of the shares increase to 1200 per share
which brings the total investments to 12000.

Q1. What happens to THE VALUE OF THE INVESTMENT bought by PAPASA Company?

STEP 01: Compute for the Value of Investment Acquired on January 01 2022
= 1000 per share x 10 shares
= 10, 000 Total Value of Investment Acquired

STEP 02 : Subtract the current selling price/ value of investments on the

investments Acquired

= 12,000 (investment price December 30) – 10,000(Investment Acquired Jan 01)

 = 2,000 Increase in the Value of Investment
Q2. How much was the profit to be recognized ON THE INVESTMENT if the shares was sold on
December 30 2022?

= 12,000-10,000 PESOS
=2000.00 PESOS

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TRY AT HOME:

On January 01 2022 ADDITIONAL Company buys 20 Shares of PONTS Company at

Php 1500 Per share.

On December 30 2022 the selling price/ value of the shares increase to 2000 per share
which brings the total investments to 40000.
Additional Company Sold the shares on December 30 2022

Q1: What happens to THE VALUE OF THE SHARES bought by additional Company PER
SHARE

Q2: How much was the profit to be recognized PER SHARE?

Q3: What happens to THE VALUE OF THE INVESTMENT bought by additional
Company?
Q4: How much was the profit to be recognized ON THE INVESTMENT ?
Q5: If the Investment was not sold, how much the profit to be recognized?

Additional points will be given to those who will submit this Try at home. Send at:
pauldoroin@gmail.com with the subject: ADDITIONAL POINTS. If not interested to answer, that would
be fine. This is not compulsory. Thank you and stay safe!
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References:
Business Finance by Cayanan A. (2017)
Business Finance for Senior High School by Flores M. (2018)