Question

How does CFO achieve the finance goal of maximizing shareholders wealth?

Answer 1

The most widely accepted objective of the firm is to maximize the value of the firm for its owners, that is, to maximize shareholder wealth. Shareholder wealth is represented by the market price of a firm’s common stock.

The shareholder wealth maximization goal states that management should seek to maximize the present value of the expected future returns to the owners (that is, shareholders) of the firm. These returns can take the form of periodic dividend payments or proceeds from the sale of the common stock.

The longer it takes to receive a benefit, such as a cash dividend or price appreciation of the firm’s stock, the lower the value investors place on that benefit. In addition, the greater the risk associated with receiving a future benefit, the lower the value investors place on that benefit. Stock prices, the measure of shareholder wealth, reflect the magnitude, timing, and risk associated with future benefits expected to be received by stockholders.

Shareholder wealth is measured by the market value of the shareholders’ common stock holdings. Market value is defined as the price at which the stock trades in the market place.

As the stock price increases, the value of the firm increases, as well as the shareholders' wealth.