Wealth max (fm)

mba presentation

1. WEALTH MAXIMIZATION AJAY KURIEN

2. WEALTH MAXIMISATION Wealth maximisation is the appropriate objective of an enterprise. Financial theory asserts that wealth maximisation is the single substitute for a stockholder’s utility. When the firm maximises the stockholder’s wealth, the individual stock holder can use this wealth to maximize his individual utility. It means that by maximizing stockholder’s wealth the firm is operating consistently towards maximizing stockholder’s utility.

3. A stockholder’s current wealth in a firm is the product of the no: of shares owned multiplied with the current stock price per share Stockholder’s current wealth = No: of shares owned * Current stock price/ share Or Wo = NPo

4. Higher the stock price per share the greater will be the stockholder’s wealth. Thus a firm should aim at maximizing its current stock price. This objective helps in increasing the value of shares in the market. The share’s market price serves as a performance index or report card in progress. It also indicates how well management is doing on behalf of the shareholder. It can be concluded by ; Maximum utility Maximum stockholder’s wealth Maximum stock price per share

5. However, the maximization of the market price of the share should be in the long run. The long run implies a period which is long enough to reflect the normal market value of the shares irrespective of short-term fluctuations. While pursuing the objective of wealth maximization, all efforts must be put in fourth for maximising the current present value of any course of action. Every financial decision should be based on cost benefit analysis. If the cost is lower than the benefit, the decision will help in maximising the wealth.

6. Implications of wealth maximisation There is a rationale in applying wealth maximising policy as on operating financial management policy. It serves the interest of suppliers of loaned capital, employees, management and society. Besides share holders , there are short-term and long term suppliers of funds who have financial interest in the concern. Short-term lenders are primarily interested in liquidity position so that they get payments in time.

7. Advantages : It serves the interests of owners, (equity share holders ) as well as other share holders. T he objective of wealth maximisation implies long-run survival and growth of the firm. It takes into consideration the risk factor and time value of money as the current present value of any particular course of action is measured. The effe ct of dividend policy on market price of share is also considered.

8. Disadvantages: It is a prescriptive idea. T he objective of wealth maximisation is not socially desirable. There is some controversy as to whether the objective is to maximise the shareholder’s wealth or the firms wealth which includes other financial claim holders.

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