SHARE PRICE MAXIMIZATION

Share price maximization

Share Price Maximization

Introduction

Share price maximization is a modern approach to financial management. Stock price maximization requires that managers take decisions that maximize stockholder wealth, that bondholders be fully protected from expropriation, that markets be efficient and that social costs be negligible.

Maximization of profit used to be the main aim of a business and financial management till the concept of Share price maximization came into being. It is a superior goal compared to profit maximization as it takes broader arena into consideration. Wealth or Value of a business is defined as the market price of the capital invested by shareholders (Vishwanath, 2007, pp. 125).

Discussion

Wealth maximization simply means maximization of shareholder's wealth. It is the combination of two words viz. wealth and maximization. Wealth of a shareholder maximizes when the net worth of a company maximizes. To be even more meticulous, a shareholder holds a share in the company or business and his wealth will improve if the share price in the market increases which in turn is a function of net worth. This is because wealth maximization is also known as net worth maximization.

Finance managers are the agents of shareholders and their job is to look after the interest of the shareholders. The objective of any shareholder or investor would be a good return on their capital and safety of their capital. Both these objectives are well served by wealth maximization as a decision criterion to business (Smart, 2008, pp. 19).

The objective of share price maximization is an appropriate and operationally feasible criterion to choose among the alternative monetary actions. It provides an unambiguous measure of what financial management should seek to maximize in making investment and financing decisions on behalf of shareholders. From the shareholders' point of view, the wealth created by a company through its actions is reflected in the market value of the company's shares. Therefore, the wealth maximization principle implies that the fundamental objective of a firm is to maximize the market value of its shares. The value of the company's shares is represented by their market price that, in turn, is a reflection of shareholders' perception about the quality of the firm's financial decisions. The market price serves as the firm's performance indicator. That is Wealth maximization means maximizing the net wealth of the company's share holders. Wealth maximization is possible only when the company pursues policies that would increase the market value of shares of the company.

The efficiency of Financial Management of any firm is judged by the success in achieving the firm's goal. The shareholder wealth maximization goal states that management should endeavor to maximize the net present value of the future expected cash flows to the shareholder of the firm. Net present value refers to the discounted value of future cash flows at the expected rate of return. Wealth maximization can be achieved only with the most efficient use of society's economic resource. Shareholders' wealth maximization is theoretically logical and operationally feasible normative goal for guiding the financial decision ...