Unit-I: Corporate Objectives

MBA-FC-31
Course Instructor: Dr Suhel Ahmad
ahmad.suhel85@gmail.com, +91-9452-9456-82
Corporate Objectives

• Corporate objectives tend to focus on the desired performance and results of

the business.
• It covers a range of key areas where the business wants to achieve results
rather than focusing on a single objective.
• For example, achieving a desired sale, become a technology giant and
market leader.
• However, the sole objective of existence of a business is to make some gain
for their investment and taking risk.
• The gain could be measured through two perspectives
• Profit Maximization
• Wealth Maximization
Profit Maximization-Wealth Maximization

Profit Maximization
• In market economy, goods and services are sold which are required by the
society at high prices, resulting into more profit.
• Competition intensified and prices stabilizes.
• In the case of less demanded products, prices falls and producers stop
producing such products and looks for more profitable alternatives.
• Profit maximization intends to producing maximum output from given input
or minimum input for given output.
• Efficiency is central to the profit maximization.
Profit Maximization-Wealth Maximization

Criticism of Profit Maximization

• Assumes perfect competition
• Earlier, businesses were self financed and sole proprietorship.
• Now, there are limited liability and many owners (shareholders).
• Stakeholders provides fund while business is controlled by professional
management and thus conflict of interest.
• In the view of profit maximization, firms might produce wasteful products
not required by the society.
Profit Maximization-Wealth Maximization

Criticism of Profit Maximization

• Profit maximization is a vague statement and its definition is not clear.
• Does it mean profit in short-term or long-term, profit before or after taxes,
total profit or PPS, operating profit or profit to the share holders.
• Time value of money is not considered while emphasizing the profit
maximization.
• Risk factors, a common phenomenon to the business activities are not
accounted.
Profit Maximization-Wealth Maximization

Maximizing Profit After Taxes (Profit Maximization)

• Consider, profit after taxes for a firm is ₹50,000 with profit per share of ₹5
and 10,000 out standing shares. The firms sells 10,000 more share
@50/share and invests the amount into a bond giving 5% return after taxes.
What happens to profit per share?
Profit Maximization-Wealth Maximization

Shareholder’s Wealth Maximization (SWM)

• It means maximizing Net Present Value (NPV) of a course of action for the
shareholders.
• NPV or Wealth is the difference between present value of benefits and
present value of its costs.
• This approach is helpful in choosing a rationale investment decision.
• Since it accounts time value of money, two mutually exclusive investments
are additive in nature (Principle of Value-Additivity)
NPV(A) + NPV(B) = NPV (A+B)
Profit Maximization-Wealth Maximization

Shareholder’s Wealth Maximization

• SWM take timing and risk into consideration
• Works on cash flow rather than accounting profits
• Thus, the fundamental objective of the SWM is to maximize the market
value of the shares.
• It seems rationale approach as compared to profit maximization.
Impediments to Wealth Maximization

• Assumes perfect competition/government intervention

• Wrong assumption of efficient capital market
• Largely depends on speculations
• Measuring risk precisely is not possible
• Discounting rate is also speculative
• Agency problem
• Different objectives and preferences of different stakeholders
Financial Market: Money Market & Capital Market

• Financial Market is the place where trading of securities is done including

the stock market, bond market, forex market, and derivatives market, among
others.
• Money Market is a component of financial market where short term
securities and loans are traded. The term (time period) is as short as
overnight and goes less than a year. Examples includes short term loans,
borrowings from banks and other financial institutions for a period less than
a year, short lived mortgage, treasury bills, commercial papers, deposits etc.
These instruments are meant primarily for maintaining liquidity. Some risk
averse investors prefer to investment in money market to safe guard their
interests.
Financial Market: Money Market & Capital Market

• Capital Market is the place where investors (lenders) and borrowers (firms)
interact for raising capitals. They majorly deal with share, bonds &
debentures and other long term instruments maturing in more than a year.
• Capital market is categorized into primary capital market and secondary
capital market.
• All these instruments and their characteristics will be dealt in coming
sessions as and when required while dealing with valuation of shares and
bonds.