OBJECTIVE OF THE FIRM: SHAREHOLDER'S WEALTH MAXIMIZATION

Presented & Submitted by: MAVERICKS Dibyendu Chakraborty Harsh Swetabh Joel Kho Prasanjit Pandey Rohit Kr. Singh Sharifuddin Mallick

What is Shareholder·s Wealth? 
The market price of the company¶s common stock.  Earnings Per Share.  Other aspects like increasing sales, capturing more Market share etc, which will take care of profitability.  Return on Investments in terms of time value of money.

How to Maximize that Wealth? 
Emphasis is on cash flows rather than profit.  By concentrating on net worth or µValue of the business¶.  Value of business = EPS / Capitalization rate.

Features of Shareholder Wealth Maximization:
Takes account of current and future profits and EPS; the timing, duration, and risk of profits and EPS; dividend policy; and all other relevant factors. Thus, share price serves as a barometer for business performance.

Main Goal of a Firm:

Maximization of Shareholder Wealth!
Value creation occurs when we maximize the share price for current shareholders.

‡ This is equivalent to saying the goal is to maximize owners¶ wealth. ‡ Let us note that the stock price is affected by management¶s decisions affecting both risk and profit. ‡ Stock price can be maintained or increased only when stockholders perceive that they are receiving profits that fully compensate them for bearing the risk they perceive.

‡ The correct goal of the firm is to maximize shareholder wealth (i.e., shareholder¶s equity) or, equivalently, to maximize the firm¶s stock price. ‡ By this we mean to imply that the managers of the firm work for the shareholders. ‡ For this reason, they have a duty to make investments that are expected to increase shareholder¶s wealth. ‡ Further, they have a duty to take all investments that are expected to increase shareholder¶s wealth.

Shareholder Wealth Maximization:
Objective of financial management Shareholder Wealth Maximization (SWM)

Objective of the financial manager

NOT
Profit maximization!
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Agency Problem: Manager v/s Shareholder·s goal
Agency Theory ± the study of how shareholders (SH) can motivate management to act in SH best interests. Long-term versus short-term value maximization ‡ Impatient capitalism focuses on the short-term value sometimes at the expense of long-term value. ‡ Exacerbated by improper management incentives from Shareholder.

What is the Goal of Management? 
As Trident becomes more deeply committed to multinational operations, a new constraint develops ± one that springs from divergent worldwide opinions and practices as to just what the firms¶ overall goal should be: 
Shareholder Wealth Maximization ± As characterized

by Anglo-American markets  Stakeholder Capitalism Model ± As characterized by Continental European and Japanese markets

Conclusions:
Shareholder¶s wealth mainly : 
Considers the timing and risk of the benefits from stock

ownership. 
Determines that a good decision increases the price of the

firm¶s common stock . 
Is an impersonal objective.  Is concerned with social responsibility.

Thank You for your precious Time and We are open for any queries«

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