Maximizing Shareholder Wealth
Denece Oplinus
Axia College of University of Phoenix
Maximizing Shareholder Wealth
Define shareholder wealth. Explain how it is measured.
Shareholder wealth is how much the shares of a particular company is worth. The largest
objective for a company is to increase the shareholder wealth for its shareholders. Consumers
decide where to invest their money based on the share price of a company. The shareholder
wealth of a company is measured by the market value of the common stock. The total
shareholder wealth equals the number of outstanding shares times the market price per share.
What are the differences between shareholder wealth maximization and profit
maximization?
There are several differences between shareholder wealth maximization and profit
maximization. Shareholder wealth maximization considers the ramifications of their decisions on
all levels, and the timing and risk involved with the decisions. Financial decisions all weighed
and analyzed heavily to ensure shareholder wealth. If a decision has the effect of increasing the
market price of the shares for the firm then it is a good decision. Shareholder wealth
maximization is also an impersonal objective; shareholders and the company both want increased
shareholder wealth. On the other hand, profit maximization is not always the best choice of
action by a firm. Profit maximization does not use a time table, nor is the word profit unilaterally
used, nor does profit maximization take into account any ricks involved.
Is the shareholder wealth maximization goal a short-term or long-term goal? Explain your
answer.
The shareholder wealth maximization is a short-term and a long-term goal. The goal is to
increase the market share price with the least amount of ramifications. An example of a shortterm goal is deciding if shareholders want $100 now or $100 in five years, they will ultimately
want the money sooner rather than later. An example of a long-term goal is deciding if
shareholders want $100 now or $1,000 in five years, they will ultimately wish to wait the five
years for the greater return on their investments.
Explain why management may tend to pursue goals other than shareholder wealth
maximization.
Management may wishes to pursue goals other than shareholder wealth maximization.
Sometimes the thought of job security causes management to make decisions that limit risk.
Most of the time problems arise with conflicting interests is from agency problems. Agency
problems are problems that arise between shareholders and the managers hired to run the
business. If the management does not have a stake in the company, they may pursue selfinterested decisions instead and bring the company down with them. To help combat this
problem, incentives can be offered to managers that increase shareholder wealth in the form of
stocks or the board of directors can make reviews. Finally, the threat of takeovers can serve as a
perfect deterrent to self-interested policies; low shareholder wealth can lead to mergers and
downsizing.