Question

‘The company’s objective should be to make investment and financing decisions with the aim of maximising long-term shareholder wealth.’

Required:

Discuss fully the above statement.

Answer 1

Main aim of any company is to provide maximum share holder wealth. This is because investors want returns in form of capital appreciation.Capital appreciation can be obtained if financial managers opt for optimum cost of capital and also increases the net income.

To increase the shareholder of a firm a future manager should try following things:

1. Increase the profits of the company: The manager should try to maximise profit by reducing costs by increasing efficiency, negotiating with the supplier,etc. He should also try to maximise revenue by increasing price or increasing amount of sales.
2. Targeting optimum capital structure:: Manager can optimise capital structure by taking more debt or issuing shares. This reduces the cost of capital and maximises the value of the firm.
3. Investing in high NPV project: Manager can choose projects with high NPV to increase the value of shareholders.

There are other objectives which the company should focus as focusing only on shareholder wealth is not sustainable and not long term goal. The other objectives which company's should focus are
1. Focusing on stakeholders: Social responsibility of the company and focusing on stakeholders like the society, customers, environment,etc cab help in sustainable growth of the government. Moreover focusing on stakeholders helps build long term image and brand equity for the company.
2. Focusing on employee:Focusing on employees , their compensation and incentives would help in better quality products and service by employees. This will indirectly increase share holder wealth by focusing on the welfare of employees. A happy employee is important for growth of a company.
3. Social Responsibility objective: Focusing on environment , eco friendly and green products(products which are biodegradable and very less impact to environment) help a company gain positive image which helps in long term existence of a company.

Shareholder wealth maximization might be short term goal but all of the above are long term goals.