Question

Describe the goal of the firm, and explain why maximizing the value of the firm is an appropriate goal for a business. you can take the point of view of a finance managers

Answer 1

In finance, the goal of the firm is always described as "maximisation of shareholder's wealth".

Profit Maximization is always used as a goal of the firm in microeconomics. In order to maximize profit, the financial manager will implement actions that would result in maximum profits without considering the consequence of his actions towards the compan's future performance.

Drawbacks of Profit maximization

There are various drawbacks of profit maximization goal mentioned as follows:-

• Profit Maximization is a short term concept.
• Profit Maximization does not consider the timing of returns.
• Profit Maximization ignores risk.

Maximization of Shareholder's Wealth

The goal is to maximize the shareholder's wealth for whom it is being operated. It is measured by the the share price of the stock, which in turn is based on the timing of returns, the amount of the returns and the risk or uncertainty of the returns.

It also means maximizing the total market value of the existing shareholder's common stock. All financial decisions will affect the achievement of this goal. Shareholder's wealth maximization can be achieved by considering the present and potential future earnings per share, timing of returns, dividend policy and other factors that affect the market price of the company's stock.

Therefore the appropriate goal for a business is maximizing the value of the firm for maximizing the shareholder's wealth.