WEALTH MAXIMIZATION

Share Holders` Wealth Maximization

Objective of Modern firms

The objective of the modern firm is not only to maximize the profit rate of the organization, but to maximize the wealth of the shareholders. This is because; the increase in the wealth of shareholders` wealth increases the opportunities for investment in the organization. The overall Value of the shareholders` wealth represented by the market price of the company's common stock, which, in turn, is a reflection of the firm's investment, financing, and dividend decisions.

Maximization of Profit and Maximization of Shareholders` Wealth

In the maximization of profits, some people believe in the traditional approach of finance the company's goal is always to maximize profits. Financial management will only take actions that would be expected to make a significant contribution to the total profits of the company. Of all the alternatives is considered, select the one that expects to have higher monetary returns. This fails for several reasons; it ignores the chance of income, cash flows available to shareholders and risk (Smith, 2008).

Introduction

The most effective way to obtain and maintain the concentration of leaders and managers in the excellence of management is through the Administration -centered principles. In this regard the application of the principles of accounting accepted as consistency or uniformity, materiality, prudence and cost valuation basis, are essential in implementing policies consistent for the organization. Allow a faster and stronger concentration to achieve corporate goals. Achieving that requires speed and strength of harmony and balance, and in turn achieves this harmony and balance requires concentration. This article aims to demonstrate that there is harmony and balance when the objectives and goals of the company geared towards maximizing shareholder wealth. And the reverse is true when only geared to maximizing profits (Fama, 1993).

The purpose of capital markets is to efficiently allocate savings in an economy from ultimate savers to ultimate users of funds who invest in tangible assets. If savings are to be channeled to the most promising investment opportunities, a rational economic criteria must exist that governs their flow. By and large, the allocation of savings in an economy occurs on the basis of expected return and risk.

A Normative Goal

The principal of maximization of shareholder wealth provides a practical guide for running a business and for the efficient allocation of resources in society, we use it as our assumed objective in considering how financial decisions should be made (Jensen, 2006).

Put another way, the equilibration process by which savings allocated in an economy occurs on the basis of expected return and risk. Holding risk constant, those economic units (business firms, households, financial institutions, or governments) willing to pay the highest yield are the ones entitled to the use of funds. If rationality prevails, the budgetary units bidding the highest yields will be the ones with the most promising investment opportunities.

In contrast, we have the maximization of shareholder wealth; the corporate owners' wealth measured by the share price, which in turn based on the timing of returns, their magnitude and ...