Shareholder Wealth Maximisation

SHAREHOLDER WEALTH maximization SUMMARY Business Finance assumes that the physical object of a company is to tap sh areholder riches. This means that companies should attempt to maximise the harbor of the shareholders investment in the company. This is achieved by maximising Total Shareholder Returns dividends and share price appreciation.The nearly powerful basis for understanding and measuring shareholder wealth is the frugal valuation model, under which the honour of the shareholders investment is measured as the present value of future cash flows that are attributable to the shareholders. This start involves converting future cash flows into their equivalent value in todays terms, by adjusting for the effect of the meter value of money. The time value of money concept refers to the reality that ? 100 today is worth to a greater extent than ? 100 in a years time.This is for three reasons pretension which reduces the purchasing power of money over time Consumption cho ice we prefer to cut down money now rather than wait to spend in the future Risk this refers to the variability of future falls from an investment. This time value of money effect means that shareholders require a rate of return from their investment in a company which is sufficient compensation for the time value of money effect that they suffer. This rate of return is known as the cost of capital.For a company to create wealth for shareholders, it must generate a rate of return which exceeds the cost of capital. Arguments in favour of shareholder wealth maximisation being the assumed objective of the company Shareholders are the legal owners of the company Shareholders bear the risk assumptive competitive markets, maximising wealth of shareholders should ensure the interests of customers and employees are also met Decision-making is alter Arguments against shareholder wealth maximisation Some ask it will give-up the ghost to the interests of other stakeholders such as customers and employees being neglected (eg through merchandise poor quality, over-priced products and providing poor conditions and rates of pay to employees). However, in competitive markets, arguably the only way that companies will create wealth for shareholders is by interchange products/services customers want to buy, and therefore customers interests cannot be ignored. Also, the way to ensure customers interests are met is arguably by ensuring staff are well motivated and decently trained.Furthermore, employees prospects of having a secure and well paid job are better by working for a company that is financially successful. Some argue that it will lead to short-termism (decisions that improve short-term profits at the expenditure of long-term value, such as reducing research and development and marketing investments). However, the concept of economic value means maximising shareholder wealth should mean that long-term and short-term performance is captured.