WEALTH MAXIMISATION

It means maximising returns to shareholders and ensuing growth to the shareholders' capital. Others such as employees, public, workers, creditors, bankers are well protected through proper legislation. It is an appropriate and operationally feasible criterion for taking financial decisions.

Wealth maximisation means maximising the net present value of future returns, to s wre 0 ers tori tie investment they make—Fo-day. The owners invest today and expect returns in future. That means any course of the financial action will necessitate the owners to invest against certain benefits to come. Thus Net present value of future benefits is the difference between gross present value of the benefits and investment required to achieve those benefits. A. financial action resulting negative net present value should be rejected. Management will adopt this criterion for all decisions they make. Among a number of desirable mutually exclusive projects, the one with the highest net present value should be adopted. The net present value (worth) or wealth can be defined more explicitly in the following way.

A1 • A 2 A

(1 + k)2 (1 + 102 (1 + k)0

where A1, A2, A3 . . An represent the stream of benefits,

C is the cost of the project,

K is the appropriate discount rate and

W is the net present worth or wealth.

The firm should adopt a course of financial action i.e., invest in such a project where there is net increase in the wealth of the firm. The wealth maxihnisation objective is consistent with the objective of maximising the owners' economic welfare. Maximising the economic welfare of owners is optimising the consumption of capital. The wealth of shareholders is reflected by the market value of a company. Therefore, the wealth maximisation principle implies the fundamental objective of a firm, which in turn is a reflection of the firm's financial decisions. The market price of a share is nothing but the performance index of the firm's progress.

According to Prof, Solomon Ezra of Stanford University, the ultimate goal of the financial management should be maximisation of the owner's wealth. According to him, the maximisation of profit is half and an. unreal motive. The proper goal of financial management is wealth maximisation of equity shareholders as it is concerned with the relationship of profitability and the volume of capital being used in the enterprise. In otherwords, the finance manager should attempt to maximise the value of the enterprise to its share holders (figure 1.1).

Value, according to Van Horne, is 'represent by the 'market price of the cornpany's common stock.' Thi7Fice takes into account fc presenrahTd prospective future earrings per share, the timing and the risk of these earnings, the dividend policy of the enterprise and many other factors.

It is, thus, an overall reflection of the investment, financing and dividend decisions of the enterprise. According to Van Horne, the market price of a company's share represents the focal judgement of all participants in the market. This can be seen most clearly by drawing upon the concept of stock and flow, if management takes maximisation of owners wealth as its major goal, it must ask what value the owners will place on a particular stream of returns.

This will direct attention to the time patter of that income stream and to the risks and uncertainty attached • to it. Thus, the fundamental issue is the value of the claims oft a stream of returns. Management must, work to bring about those flows that provides the highest possible market value to the ownership claim on the firm.

LIQUIDITY vs PROFITABILITY | MAXIMISATION OF RETURN | WEALTH MAXIMISATION | Constraints - Policy Decisions - Profitability | IMPLICATIONS OF WEALTH MAXIMISATION | Suppliers of Loan Capital | RELEVANCE OF WEALTH MAXIMISATION | Retaining earning and Undistributed profits | Managerial finance function | Functions of Financial Management | FINANCIAL FORECASTING | MANAGEMENT OF CORPORATION ASSET STRUCTURE | THE MANAGEMENT OF INCOME | MANAGEMENT OF CASH | DECIDING OUT NEW SOURCES OF FINANCE | CONTACT AND CARRY NEGOTIATIONS FOR NEW FINANCING | ANALYSIS AND APPRAISAL OF FINANCIAL PERFORMANCE | INCIDENTAL OR ROUTINE FUNCTIONS | CAPITAL BUDGETING DECISION | CURRENT ASSET MANAGEMENT | Maximisation of Share Value | RESPONSIBILITIES OF FINANCIAL MANAGEMENT IN THE FIRM | Functions of the Treasurer and Controller | TASKS OF FINANCIAL MANAGEMENT | CHALLENGES OF FINANCIAL MANAGEMENT | Gross and Net Savings | Household Savings | How to politely win when credit disputes and problems arise