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. Do you think maximizing shareholders’ wealth also applies in Saudi Arabia?

For your discussion post, your first step is to summarize the article in two paragraphs, describing what you think are the most important points made by the authors (remember to use citations where appropriate). For the second step, include the reference listing with a hyperlink to the article. Do not copy the article into your post and limit your summary to two paragraphs. Let your instructor know if you have any questions and enjoy your search.

Answer 1

AS PER THE DEFINITION:WEALTH MAXIMISATION IS A PROCESS THAT INCREASES THE CURRENT NET VALUE OF BUSINESS OR SHAREHOLDER CAPITAL GAINS, WITH THE OBJECTIVE OF BRINGING IN THE HIGHEST POSSIBLE RETURN.
VALUE OF AN ENTERPRISE IS DETERMINED ON THE BASIS OF MARKET PRICE OF STOCK THEREFORE HIGHER MARKET PRICES MEANS HIGHER VALUE OF SHARES AND HIGHER VALUE OF ULTIMATELY THE ENTERPRISE.HENCE  HIGH VALUE OF BUSINESS AND HIGHER DIVIDEND LEADS TO MAXIMISATION OF SHAREHOLDERS WEALTH.(IN GENERAL TERMS THE MORE THE VALUE OF FIRM BETTER THE DIVIDEND ULTIMATELY HIGHER THE VALUE OF SHAREHOLDERS WEALTH)

IN THE FORM OF EQUATION IT CAN BE PRESENTED AS

WEALTH=PRESENT VALUE OF BENEFITS MINUS PRESENT VALUE OF COSTS

ALSO

VALUE OF A FIRM=NUMBER OF SHARES*MARKET PRICE

OR (VALUE OF EQUITY+VALUE OF DEBT)THE IMPACT OF WEALTH MAXIMISATION ON SOCIETY CAN BE DISCUSSED ASFOLLOWS

ADVANTAGES:

1. SHAREHOLDER -HELPS TO MAINTAIN AN OPTIMUM RETURN ON INVESTMENT

2. CUSTOMERS -IT HELPS TO PROVIDE QUALITY SERVICE TO MAINTAIN GOODWILL HENCE PROVIDING CUSTOMER SATISFACTION

3. EMPLOYEES -HONOUR EMPLOYEES AS MOST VALUABLE RESOURCE

4. COMMUNITY-ENHANCES COOPERATE LEADERSHIP

ALSO OPERATES COMPATIBILITY WITH ENVIRONMENTAL STANDARDS AND INITIATE PROGRAMS THAT ARE SENSITIVE TO ENVIRONMENTAL ISSUES

5. ECONOMY –DUE TO BETTER INVESTING,FINANCING AND DIVIDEND DECISIONS CASH FLOW IN ECONOMY RISES.

DISADVANTAGE

1. CONFLICT BETWEEN SHAREHOLDERS AND CREDITORS- AS CREDITORS HAVE A FIXED RETURN HOWEVER DUE TO THE OBJECTIVE OF WEALTH MAXIMIZATION THE WEALTH OF SHAREHOLDERS IS VARIABLE HENCE CONFLICTS MAY ARISE. example CREDITORS GET RETURN ON LOANS,DEBTS WHEREAS SHAREHOLDERS GET DIVIDENDS.

2. CONFLICT BETWEEN SHAREHOLDERS AND MANAGERS-ANOTHER CONSTRAINT POSSIBLE IS AS EVERY PERSON PART OF THE ORGANIZATION SHOULD AIM FOR WELFARE OF THE ORGANIZATION .THEREFORE MANAGER’S AIM IS FOR LONG TERM SURVIVAL IN BUSINESS THAT IS JOB SECURITY HOWEVER SHAREHOLDERS OBJECTIVE BECOMES WEALTH MAXIMIZATION HENCE THE GOAL CONGRUENCY MIGHT GET DISTURBED LEADING TO CONFLICT.

3. OTHER DISADVANTAGES WHICH STAKEHOLDERS MIGHT POINT OUT ARE NO CLEAR RELATIONSHIP BETWEEN FINANCIAL DECISION AND SHARE PRICES ULTIMATELY CONFLICTS MIGHT LEAD TO MANAGEMENT ANXIETY AND FRUSTRATION.

HOWEVER STILL TO CONCLUDE WITH PROS AND CONS ARE THERE BUT WHEN SHAREHOLDER INTEREST IS MAXIMIZED THE INTEREST OF SOCIETY ARE OPTIMIZED.

AS EVERY COUNTRY HAS COMPANIES WHO FOLLOW THE STRATEGIES OF WEALTH MAXIMISATION

SAUDI ARABIA TOO BEING AN ECONOMY WHICH COMES AMONG TOP 20ECONOMIES OF THE WORLD ITS COMPANIES AIMING FOR HIGHER GROWTH AND RETURNS MUST BE FOLLOWING WELTH MAXIMISATION STRATEGY UNLESS NOT PROHIBITED BY ITS ITS LEGAL PROVISIONS OF COMPANIES.