Question

The purpose of the financial management is to maximize shareholders wealth. What is the meaning of shareholders wealth maximization? If a company attempts to maximize its shareholders wealth, is this good or bad for society? Explain by providing some examples.

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Answer 1

The purpose of Financial Management is to maximize the wealth of the shareholder and shareholder are the principles for the managers as managers are the agents and hence the primary goal of shareholder wealth maximization is maximization of the market capitalisation of the company which will be increasing the overall capital of the shareholder and increasing the overall health of these shareholders.

Shareholder wealth maximization means maximization of the capital which is invested into the company by this shareholder and it is maximized by maximization of the price of the company. It is also done to protect the interest of shareholders.

If the company wants to maximize the value of the shareholders it will be not good for the society because the company will be taking also such steps in order to maximize the profit and hence, the overall value of the shareholders so they will be not trying to spend on the social responsibility cost and work for the society, but they would rather maximize the overall profits of the shareholders and they will be trying to maximize the value of the shareholders wealth by maximization of the price of the company and market capitalisation of the company.