Question

What actions should a financial manager make in order to maximize the value of the company's stock? does it mean that maximizing profit results to maximizing the company's stock value?

Answer 1

Financial Manager can maximize the value of company's stock by the following ways:

(1) By making investment in those project which add value to the shreholders wealth and results in increase the value of investment. This can be done by adding investment proposals with positive net present value

(2) Shareholders wealth i.e. value of company's stock can be increased by effectively managing the retained earnings of the company. If the Investment return is greater than the required rate of return profit should be maintained and kept as retained earnings for further expansion.

(3) Management of dividend policies and decisions can affect the shareholders wealth or value of common stock.

(4) Company can better manage its capital structure to increase the shareholders wealth by reducing the required rate of return and by reducing the cost of finance.

Maximizing profit does not always means increase in shareholders wealth, profit maximization does not always results in wealth maximization but wealth maximization means increase in value of shareholdrs or value of shares. Wealth maximization always works in long term and profit maximization is a vague term so we can not say that profit mazmization always leads to wealth maximization. For example if a company sold out its plant and machinery to earn profit so this would not result in wealth maximization as company is loosing its earning capacity which will results in loss of revenue over a period of years while profit from sale of plant and equipment would be for a single term so this would affect the value of share or shareholders wealth.