Share on Facebook Maximizing shareholder wealth has long been a key goal for a typical for-profit business. The idea behind this approach is that all decisions and company activities should align with the objective of making maximum profit and generating optimum growth in company share price. Despite some criticisms from social and environmental groups, maximizing shareholder wealth provides some key benefits to a business.
Firstly, the wealth maximization is based on cash flows and not on profits. Unlike the profits, cash flows are exact and definite and therefore avoid any ambiguity associated with accounting profits.
There is a change in method of depreciationthere is a change in profit. It is not the case in case of Cashflows. Secondly, profit maximization presents a shorter term view as compared to wealth maximization.
Maximizing shareholder wealth has long been a key goal for a typical for-profit business. The idea behind this approach is that all decisions and company activities should align with the objective of making maximum profit and generating optimum growth in company share price. If there’s one true thing in life, it is that money will come and go. Yet without a sound financial plan, sustainably building wealth can become quite complex. Claire joined the firm in and is a Chartered Accountant and Chartered Tax advisor with over 30 years’ experience of advising clients, from start-ups to international businesses, on corporate and personal tax issues.
Short-term profit maximization can be achieved by the managers at the cost of long-term sustainability of the business. Thirdly, wealth maximization considers the time value of money. It is important as we all know that a dollar today and a dollar one-year latter do not have the same value.
In wealth maximization, the future cash flows are discounted at an appropriate discounted rate to represent their present value.
Suppose there are two projects A and B, project A is more profitable however it is going to generate profit over a long period of time, while project B is less profitable however it is able to generate return in a shorter period.
In a situation of an uncertainty, project B may be preferable. So, timing of returns is ignored by profit maximization, it is considered in wealth maximization. Fourthly, the wealth-maximization criterion considers the risk and uncertainty factor while considering the discounting rate.
The discounting rate reflects both time and risk. Higher the uncertainty, the discounting rate is higher and vice-versa. Positive and higher EVA would increase the wealth of the shareholders and thereby create value.
In summary, the wealth maximization as an objective to financial management and other business decisions enables the shareholders to achieve their objectives and therefore is superior to profit maximization.
For financial managers, it is a decision criterion being used for all the decisions.
For more clarity, refer Profit Maximization vs. Capital investment decisions of a firm have a direct relation with wealth maximization.
All capital investment projects with an internal rate of return IRR greater than cost of capital or having positive NPV or creates value for the firm.
In other words, these projects maximize the wealth of the shareholders because they are earning more than what they can earn by investing themselves.It’s become fashionable to blame the pursuit of shareholder value for the ills besetting corporate America: managers and investors obsessed .
“Maximizing shareholder wealth is the most superior objective of the company, is not it?”.
It is the difficult question which a lot of businesses need to clear up. In the world, there are a great number of companies which pursuit the policy “shareholder wealth maximization”.
From its establishment as a one man start up in London, Global Strategies Group (‘GLOBAL’) quickly grew from a strategic risk consultancy for government and commercial organisations, to providing a comprehensive range of strategic and operational support in challenging environments, including physical security services, training and capacity .
Two-a-Day, previously named Elgin Fruit Packers Co-operative Limited, was incorporated as a primary agricultural co-operative in the Elgin district, Western Cape, South Africa on 19 June with 18 shareholders which makes it the oldest and longest established local co-operative.
If there’s one true thing in life, it is that money will come and go. Yet without a sound financial plan, sustainably building wealth can become quite complex. Jun 26, · No popular idea ever has a single origin. But the idea that the sole purpose of a firm is to make money for its shareholders got going in a major way with an article by Milton Friedman in the New.