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Introduction to the Field and Goals of Financia... > Goals of Financial Management
Goals of Financial Management
• Valuation
• Maximizing Shareholder and Market Value
• Maximizing Value Without Harming Stakeholders
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Introduction to the Field and Goals of Financia... > Goals of Financial Management
Valuation
• In finance, valuation is the process of estimating what something is worth.
Valuation is used to for a variety of purposes: the purchase or sale of a business,
appraisal to resolve disputes, managerial decisions of how to allocate business
resources, and many other business and legal purposes.
• Valuation often relies on fundamental financial statement analysis using tools
such as discounted cash flow or net present value. As such, an accurate
valuation, especially of privately owned companies, largely depends on the
reliability of the firm's historic financial information.
• Not only do managers want to keep reliable financial statements so that they can
know the value of their own businesses, but they also want to manage finances
Valuation
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well to enhance the value of their businesses to potential buyers, creditors, or
investors.
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Introduction to the Field and Goals of Financia... > Goals of Financial Management
Maximizing Shareholder and Market Value
• One interpretation of proper financial management is that the agents are oriented
toward the benefit of the principals, shareholders, and in increasing their wealth
by paying dividends and/or causing the stock price or market value to increase.
• The idea of maximizing market value is related to the idea of maximizing
shareholder value, as market value is the price at which an asset would trade in a
competitive auction setting; for example, returning value to the shareholders if
they decide to sell shares or if the firm decides to sell.
• There are many different models of corporate governance around the world.
These differ according to the variety of capitalism in which they are embedded.
The Anglo-American (US and UK) "model" tends to emphasize the interests of
Money to Shareholders
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shareholders.
• The sole concentration on shareholder value has been criticized, for concern that
a management decision can maximize shareholder value while lowering the
welfare of other stakeholders. Additionally, short-term focus on shareholder value
can be detrimental to long-term shareholder value.
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Introduction to the Field and Goals of Financia... > Goals of Financial Management
Maximizing Value Without Harming Stakeholders
• Stakeholders are those who are affected by an organization's activities. The
stakeholders can be internal or external to the firm and some will be involved
directly in economic transactions with the business, while others will not.
• Owners, employees, customers, suppliers, trade unions, the government, local
communities, and the environment can be considered stakeholders. Because of
the potential breadth of the term, there are different views on whom to include in
stakeholder considerations.
• Debate is ongoing about whether firms should be managed for shareholder value
maximization or also with stakeholders in mind. While the Anglo-American
"model" tends to emphasize shareholders, some European countries formally
Environment as stakeholder
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recognize other stakeholders in corporate governance decisions.
• Some proponents of stakeholder considerations argue that attention to other
stakeholders is intimitely intertwined with market value and can enhance
outcomes for all stakeholders. Others argue that value should be maximized
without harming stakeholders.
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Appendix
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Introduction to the Field and Goals of Financia...
Key terms
• financial statement A formal record of all relevant financial information of a business, person, or other entity, presented in a
structured and standardized manner to allow easy understanding.
• fundamental analysis An analysis of a business with the goal of financial projections in terms of income statement, financial
statements and health, management and competitive advantages, and competitors and markets.
• market value The total value of the company as traded in the market. Calculated by multiplying the number of shares
outstanding by the price per share.
• market value The total value of the company as traded in the market. Calculated by multiplying the number of shares
outstanding by the price per share.
• principal One who directs another (the agent) to act on one′s behalf.
• shareholder One who owns shares of stock.
• stakeholder A person or organisation with a legitimate interest in a given situation, action or enterprise.
• valuation The process of estimating the market value of a financial asset or liability.
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Introduction to the Field and Goals of Financia...
Valuation
Valuation is, for some, one of the goals of financial management.
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Flickr. "Value for money | Flickr - Photo Sharing!." CC BY http://www.flickr.com/photos/fairbrand/2225822546/ View on Boundless.com
Introduction to the Field and Goals of Financia...
Money to Shareholders
Maximizing shareholder and market value is, for some, one of the goals of financial management.
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Flickr. "Money | Flickr - Photo Sharing!." CC BY-SA http://www.flickr.com/photos/68751915@N05/6848823919/ View on Boundless.com
Introduction to the Field and Goals of Financia...
Environment as stakeholder
The environment can be seen as a stakeholder. Maximizing value without harming stakeholders is, for some, one of the goals of financial management.
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Introduction to the Field and Goals of Financia...
Which of the following is NOT a true statement regarding the
valuation process?
A) Valuation is a forward looking process, so historical data is
unimportant.
B) Valuation often relies on fundamental analysis, such as discounted
cash flow or net present value.
C) Valuation can be done on assets or on liabilities.
D) Valuation is is the process of estimating what something is worth.
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Introduction to the Field and Goals of Financia...
Which of the following is NOT a true statement regarding the
valuation process?
A) Valuation is a forward looking process, so historical data is
unimportant.
B) Valuation often relies on fundamental analysis, such as discounted
cash flow or net present value.
C) Valuation can be done on assets or on liabilities.
D) Valuation is is the process of estimating what something is worth.
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Introduction to the Field and Goals of Financia...
Which of the following statements regarding shareholder and
market value is correct?
A) Short-term focus on shareholder value is never detrimental to longterm shareholder value.
B) Market value is the price at which a shareholder is willing to sell.
C) All of these answers.
D) The idea of maximizing market value is related to the idea of
maximizing shareholder value.
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Introduction to the Field and Goals of Financia...
Which of the following statements regarding shareholder and
market value is correct?
A) Short-term focus on shareholder value is never detrimental to longterm shareholder value.
B) Market value is the price at which a shareholder is willing to sell.
C) All of these answers.
D) The idea of maximizing market value is related to the idea of
maximizing shareholder value.
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Introduction to the Field and Goals of Financia...
Which of the following is a stakeholder in a company?
A) The company's shareholders
B) All of these
C) The company's employees
D) The company's suppliers
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Introduction to the Field and Goals of Financia...
Which of the following is a stakeholder in a company?
A) The company's shareholders
B) All of these
C) The company's employees
D) The company's suppliers
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Introduction to the Field and Goals of Financia...
Each of the following is an argument for considering the interests
of a broad group of stakeholders when making corporate
decisions EXCEPT:
A) A holistic view of stakeholder interests can enhance general outcomes
for all stakeholders involved.
B) Making decisions purely to maximize shareholder value may harm
other stakeholders.
C) Since stakeholders are direct owners of the company, their interests
should be protected.
D) The interests of outside stakeholders are often closely intertwined with
a company's market value.
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Introduction to the Field and Goals of Financia...
Each of the following is an argument for considering the interests
of a broad group of stakeholders when making corporate
decisions EXCEPT:
A) A holistic view of stakeholder interests can enhance general outcomes
for all stakeholders involved.
B) Making decisions purely to maximize shareholder value may harm
other stakeholders.
C) Since stakeholders are direct owners of the company, their interests
should be protected.
D) The interests of outside stakeholders are often closely intertwined with
a company's market value.
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Introduction to the Field and Goals of Financia...
Attribution
• Wikibooks. "GCSE Business Studies/Stakeholders." CC BY-SA 3.0
http://en.wikibooks.org/wiki/GCSE_Business_Studies/Stakeholders
• Wikipedia. "Stakeholder (corporate)." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Stakeholder_%2528corporate%2529
• Wikipedia. "Corporate governance." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Corporate_governance
• Boundless Learning. "Boundless." CC BY-SA 3.0 http://www.boundless.com//finance/definition/market-value
• Wiktionary. "stakeholder." CC BY-SA 3.0 http://en.wiktionary.org/wiki/stakeholder
• Wikipedia. "Business valuation." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Business_valuation
• Wikipedia. "Valuation (finance)." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Valuation_%2528finance%2529
• Wikipedia. "Managerial finance." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Managerial_finance
• Wikipedia. "Corporate finance." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Corporate_finance
• Wiktionary. "financial statement." CC BY-SA 3.0 http://en.wiktionary.org/wiki/financial+statement
• Wiktionary. "fundamental analysis." CC BY-SA 3.0 http://en.wiktionary.org/wiki/fundamental+analysis
• Wiktionary. "valuation." CC BY-SA 3.0 http://en.wiktionary.org/wiki/valuation
• Wikipedia. "Corporate governance." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Corporate_governance
• Wikipedia. "Market value." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Market_value
• Wikipedia. "Shareholder value." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Shareholder_value
• Wiktionary. "shareholder." CC BY-SA 3.0 http://en.wiktionary.org/wiki/shareholder
• Boundless Learning. "Boundless." CC BY-SA 3.0 http://www.boundless.com//finance/definition/market-value
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Introduction to the Field and Goals of Financia...
• Wiktionary. "principal." CC BY-SA 3.0 http://en.wiktionary.org/wiki/principal
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