Edna D.

Pascua
Advance Financial Management
March 11, 2023

1. Explain the Shareholder wealth maximization goal and how it can be measured. Make an
argument for why it is a better goal than making profit?

-The shareholder wealth maximization goal states that management should seek to
maximize the present value of the expected future returns to the owners of the firm.
These returns can take the form of periodic dividend payments or proceeds from sale of
the common stock.
-Shareholder wealth is measured by the market value of the shareholders common stock
holding. Market value is defined as the price at which the stock trades in the market
place, such as the Philippine Stock Exchange.

-Profit maximization is the process by which a business arranges its prices and cost
structure to achieve the highest possible profit. The central goal of the organization is
to increase its profits.

-Wealth maximization is the concept of increasing the value of a business in order to

enhance the value of the shares held by its stockholders. This may involve additional
investments in intellectual property and strategic positioning, as well as attention to
managing the risk profile of a business.
The essential difference between the maximization of profits and the maximization of
wealth is that the profits focus is on short-term earnings, while the wealth focus is on
increasing the overall value of the business entity over time.
2. For each type of decision, give an example of a business transaction that would be
relevant?

*Investment Decision
-An investment decision revolves around spending capital on assets that will yield the
highest return for the company over a desired time period. In other words, the decision is
about what to buy so that the company will gain the most value. Mr. ABC is planning to
invest in Time deposit in a bank or Cooperative. He may inquire in both firm which firm
is offering the highest interest rate.

*Financing Decision
-Financing decisions refer to the decisions that companies need to take regarding what
proportion of equity and debt capital to have in their capital structure. This plays a very
important role vis-a-vis financing its assets, investment-related decisions, and shareholder
value creation. ABC company need funds, their decision is to borrow from a banks but
before borrowing they should assess their financial statement if they can pay that
borrowings on maturity date.

*Dividend Decision
-It is the decision about how much of earnings to pay out as dividends versus retaining
and reinvesting earnings in the firm. Dividend policy must be evaluated in light of the
objective of the firm namely, to choose a policy that will maximize the value of the firm
to its shareholders. Mr. ABC decides to become a member in a Cooperative, he will pay
for his share capital and at the end of the year he will get his interest on share capital and
patronage.