Wealth maximization goal of financial management
The primary goal of financial management is shareholder wealth maximization, which translates into maximizing the price of the firm’s common stock. It is a long-term goal and involves multiple external factors like sales, products, services, market share, etc. This is also known as a value maximization or net present worth maximization. The ultimate goal of the concern is to improve the market value of its shares.
It is defined as the management of financial resources aimed at increasing the value of the stakeholders of the company. Shareholder wealth maximization means maximizing the net present value of a course of action to shareholders. It focuses on increasing the value of the stakeholders of the company in the long term. It assumes the risk and recognizes the time value of money given the business environment of the operating entity. The net present value of a course of action is the difference between the present value of its benefits and the present value of its cost. The market value of the firm is based on many factors like their goodwill, sales, services, quality of products, etc. Nowadays value maximization is almost universally accepted as an appropriate operational decision criterion for financial management decisions. It helps in achieving a larger value of a company’s worth which may reflect in the increased market share of the company.
Rational of wealth maximization:
- Clear concept.
- Consideration time value of money.
- Both quantitative and qualitative considerations.
- Emphasis on an increase in the share price.
Favorable Arguments: Wealth maximization is superior to the profit maximization because the main aim of the business concern under this concept is to improve the value or wealth of the shareholders. It considers both time and risk of the business concern. It ensures the economic interest of the society.
Unfavorable Arguments: Wealth maximization leads to the prescriptive ideas of the business concern but it may not be suitable to present-day business activities. It creates ownership-management controversy. It can be activated only with the help of the profitable position of the business concern.