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?

Note:

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.

Answer 1

Maximization of shareholder's wealth - meaning

Maximization of shareholder's wealth, in simple terms mean to increase the profit of the firm. Increasing the profit of the firm will build up the wealth of shareholders. It will lead to growth and development of the enterprise. There are mainly two ways of increasing the profit:

1. Increasing the selling price

2. Decreasing the cost of production

With cost remaining unchanged, if the selling price of the product increases, it will ultimately lead to an increase in the profit. Similarly, with the selling price remaining constant, reducing the cost of production with alternative production techniques, can increase the profit of the firm.

An increase in the profit of the firm will reward shareholders with more divident and better price for the common stocks. Maximization of shareholders wealth is thus the foremost objective of financial management.

Shareholder's wealth maximization - Good or Bad

Better profit is the motive of each organisation in the corporate world. The cons of the priciple of Wealth maximization are as follows:

1. Financial managers working with the motive of increasing shareholders wealth might ignore the interest of other stakeholders.

2. There are also instances where the firm will take any means to increase the profit. This can plunder the morale of the firm. It can also lead to greedy decisions of the firm.

3. High profits can sustain the firm in the short run, but in the long run social responsibility of the firm is of great concern.

The great recession of 2008 is an output of the extreme concentration on the maximization of shareholders wealth.

There are many benefits of this principle to the society.

1. The resources are scarce. The firm with the motive of maximising profit will obviously utilise the resources judiciously. Thus there will be less wastage of resources.

2. The firm will always consider its fame and name. Social responsibility will increase the reputation of the firm. Thus social development activities will have a role in the decisions of the firm.

So it can be concluded that the concept of shareholder's wealth maximization is good for all if it is practiced ethically. Otherwise, it can even lead to the fall of the economy.

Wealth maximization in Saudi Arabia

Saudi Arabia is not an exemption to this concept. Firms functioning with profit motive will always concentrate on the wealth maximisation of the shareholders. No law in Saudi Arabia is an denies the corporate world from this activity.