Discuss the common goal of stockholder wealth maximization and the impact this can have on a financial manager.
Ultimately, it would seem that the financial manager’s goal should be the maximization of profits which also ensures the stockholder wealth maximization. The more the firm’s revenues and profits increase, the greater the dividends enjoyed by the stockholders. Day to day decisions made by the financial manager influence revenues and impact the stockholders value both positively and negatively.
According to Foundations of Financial Management, shareholder wealth maximization is defined as “achieving the highest possible value for the firm” (Block, Hirt, Danielsen, 2009, p. 12). Additionally, the financial manager cannot control nor predict the firm’s stock price. The financial manager must be able to envision the best result that will positively affect the stock price and encourage market confidence for long-term investment.
Investor decisions must weigh the outlook involving risk and return. The greater the risk involved, generally the greater return that can be achieved. By judging the financial manager’s decisions for long-term investment, a stockholder is able to ascertain the likelihood of the firm’s ability to continue to increase profitability. This makes the financial manager’s decision-making task even more difficult due to the fact that not all market factors are able to be predicted, much less predicted accurately (Block, Hirt, Danielsen, 2009, p. 13).
Profit maximization or wealth maximization refers to the amount of money made by a firm (Wiki Answers, 2009). If a firm makes a large amount of profit yet does not do so in an efficient manner, the wealth maximization is not met and the shareholder wealth is not maximized because the market will be able to witness the inefficiency (Block, Hirt, Danielsen, 2009, p. 12).
Block, Stanley B., Hirt, Geoffrey A., & Danielsen, Bartley R. (2009). Foundations of financial management (13th...