Question

In: Finance

How is maximizing sharholders wealth good for society?

How is maximizing sharholders wealth good for society?

Solutions

Expert Solution

Maximizing shareholders' wealth is achieved by undertaking investments that have positive net present value.

Positive NPV arises when the PV of cash inflows from a project is more than the PV of the cash outflows associated with the project when both are discounted at the appropriate rate. This ensures that resources are used only when the output has more value; which means that resources are used optimally. When resources are used optimally, the ultimate beneficiary is the society.

Simpler answer:

Shareholders' wealth is maximized when the share prices increase as share prices are a reflection of the prospects of the firm with regard to its future profitability and growth.

Profitability and growth are achieved by investing in projects that use scarce resources of the society to produce goods or services that have greater value than the resources used to produce them. When resources are thus used optimally the society is ultimately benefitted.

From the society's point of view, the benefits are, the supply of goods and services at reasonable prices, provision of employment, increase in revenues from taxes for the state and so on.


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