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.

Answer 1

This statement is true in a way that for managers maximizing value of the firm, value of the common stock of the company and value of the shareholders are all the same. The different stakeholders to which the managers deal in for example creditors, employees, third parties etc which work for the benefit of the organization and in return they receive renumeration. When all these stakeholders work for the common purpose they lead to the creation of profits and increase in the value for the firm and increase in the market capitalization too which is the price of the share multiplied by number of shares. The increase in value makes the company attractive for the investors to make a higer return on investment. Due to market forces of demand and supply. Increasing demand increases the price of share. This Cycle continues and the price per share increases of the firm creates value and the investors find it attractive to invest.

So for manangers, these all the three aspects are same.

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