For a business, it is not necessary that profit should be the only objective; it may concentrate on various aspects such as maximisation of share price, maximisation of sales, capturing more market shares, return on capital employed among others, which will take care of profitability.
Required:
Explain why maximization of a company’s share price is preferred as a financial objective to maximization of its sales. (6 marks)
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- It serves the interests of owners, (shareholders) as well as other stakeholders in the firm; i.e. suppliers of loaned capital, employees, creditors and society.
- It is consistent with the objective of owners’ economic welfare.
- The objective of wealth maximization implies long-run survival and growth of the firm.
- It takes into consideration the risk factor and the time value of money as the current present value of any particular course of action is measured.
- The effect of dividend policy on market price of shares is also considered as the decisions are taken to increase the market value of the shares.
- The goal of wealth maximization leads towards maximizing stockholder’s utility or value maximization of equity shareholders through increase in stock price per share.