Question

According to the text, maximizing shareholder wealth, maximizing stock price per share, and maximizing the value of the firm are one and the same. That is, if a manager maximizes the value of the firm, that manager will also be maximizing shareholder wealth and the price per share of the company’s common stock. Explain this relationship.

Business Finance, FINC 3155

Answer 1

Value of the firm is computed by multiplying the market value of per share by the total number of shares outstanding. Therefore their is a direct relationshipship between the value of the firm and stock price per share which means if the company's stock price (market price) increases then it will also increase the value of the firm.

Shareholders are those individuals or companies that have an ownership interest in the company because of their investments in the company, it means all profits from the company will be considered as shareholders' profits. Therefore all efforts are made in order to maximizing stock price also helps in maximizing the shareholders wealth as well. Therefore maximizing shareholder wealth, maximizing stock price per share, and maximizing the value of the firm all are same and directed towards a single goal of shareholders wealth maximization and in order to do that managers and shareholders tend to maximize the stock price per share that results in the increased value of the firm.