Compare the financial manager’s viewpoint with the viewpoint of an employee or stockholder with regard to maximizing share value.
Financial Management means the efficient use of economic resources namely capital funds and deals with the procurement of funds. Generally, the source of funds of companies is from the contribution of shareholders.
The objective of a firm is to maximize value or wealth. Value of a firm is represented by the market price of the company’s common stock. The market price of a firm’s stock represents the focal judgment of all market participants as to what the value of the particular firm is. It takes in to account present and prospective future earnings per share, the timing and risk of these earning, the dividend policy of the firm and many other factors that bear upon the market price of the stock. Market price acts as the performance index or report card of the firm’s progress.
Value maximization is defined as the reduction in the expected costs of business disruption, exceed the expected costs.
In the viewpoint of the financial manager, maximizing profit is the primary objective in order to maximize also the shareholder value. Businesses must make profits for surviving. Corporations must provide a higher return on their equity capital. The profits that are made create trust from the investors and are usually reflected in higher share prices. The profits are also a source of corporate competitive health and wealth.
In maximizing share value, the management should create sustained profitable growth, maintain a disciplined approach to decision making, build upon financial health as a competitive advantage, and foster a culture of integrity and transparency. Financial manager need to link investment to growth that drives profitability in order to increase shareholder value.
Shareholders prefer maximization at the level of their portfolio or an industry, not at the individual firm level. Shareholders interests are typically equated with share price. The many diversified shareholders, including large institutional investors, do not maximize their return based on the performance of a single firm; firm externalities may diminish overall portfolio performance.
Shareholders focus on profit after tax, cash flow and growth strategy. They believe that the success of the organization can be measured by share price, dividends, and economic profit. They believe that the purpose of a company is first and foremost to maximize shareholder value.
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