The goal of the firm is Value Maximization or net present worth maximization.
In current academic literature,value maximization is almost universally accepted as an appropriate operational decision criterion for financial management decisions as it removes the technical limitations which characterize the earlier profit maximization criterion
2. What is the goal of the firm?
The goal of the firm is Value Maximization or net
present worth maximization.
In current academic literature,value maximization
is almost universally accepted as an appropriate
operational decision criterion for financial
management decisions as it removes the
technical limitations which characterize the earlier
profit maximization criterion.
3. Objectives
Its operational features satisfy all the three requirements of a
suitable operational objective of financial course of action,
namely:
1. Exactness: Measuring benefits in terms of cash flows
avoids the ambiguity associated with accounting profits.
2. Quality of benefits: It considers both the quality and
quantity dimensions of benefits
3. Time value of money: It incorporates the time value of
money.
Exactness
Quality of
benefits
Time value
of money
Objectives
4. Discuss how to measure achievement of this
goal?
There are two important issues are related to measure
achievement of this goal ,namely,
1. Economic Value Added (It is a popular measure currently being
used by several firms to determine whether an existing/proposed
investment positively contributes to the owners/shareholders
wealth.)
2. Focus on Stakeholders (The shareholders wealth maximization
as the primary goal notwithstanding, there is a broader focus in
financial management to include the interest of the
stakeholders as well as the shareholders.)
