Wealth maximization is the appropriate objective of a firm according to financial theory. When a firm maximizes shareholder wealth, individual shareholders can then use that wealth to maximize their own utility. A shareholder's current wealth equals the number of shares owned multiplied by the current stock price per share. Therefore, firms should aim to maximize their current stock price in order to increase shareholder wealth and value. However, stock price maximization should be pursued over the long run to reflect the normal market value, not just short-term fluctuations. Financial decisions should increase the current present value through cost-benefit analysis.

1. WEALTH
MAXIMIZATION
AJAY KURIEN

2. WEALTH MAXIMISATION
Wealth maximisation is the appropriate objective of an
enterprise. Financial theory asserts that wealth
maximisation is the single substitute for a stockholder’s
utility. When the firm maximises the stockholder’s
wealth, the individual stock holder can use this wealth
to maximize his individual utility. It means that by
maximizing stockholder’s wealth the firm is operating
consistently towards maximizing stockholder’s utility.

3. A stockholder’s current wealth in a firm is the product of
the no: of shares owned multiplied with the current stock
price per share
Stockholder’s current wealth = No: of shares owned * Current
stock price/ share
Or
Wo= NPo

4. Higher the stock price per share the greater will be the
stockholder’s wealth. Thus a firm should aim at
maximizing its current stock price. This objective helps in
increasing the value of shares in the market. The share’s
market price serves as a performance index or report
card in progress. It also indicates how well management
is doing on behalf of the shareholder.
It can be concluded by ;
Maximum utility Maximum stockholder’s
wealth Maximum stock price per share

5.  However, the maximization of the market price of the
share should be in the long run. The long run implies a
period which is long enough to reflect the normal market
value of the shares irrespective of short-term
fluctuations.
 While pursuing the objective of wealth maximization,
all efforts must be put in fourth for maximising the
current present value of any course of action. Every
financial decision should be based on cost benefit
analysis. If the cost is lower than the benefit, the
decision will help in maximising the wealth.

6. Implications of wealth maximisation
There is a rationale in applying wealth
maximising policy as on operating financial
management policy. It serves the interest of
suppliers of loaned capital, employees,
management and society. Besides share holders,
there are short-term and long term suppliers of
funds who have financial interest in the concern.
Short-term lenders are primarily interested in
liquidity position so that they get payments in
time.

7. Advantages :
 It serves the interests of owners, (equity share
holders ) as well as other share holders.
 The objective of wealth maximisation implies
long-run survival and growth of the firm.
 It takes into consideration the risk factor and
time value of money as the current present value
of any particular course of action is measured.
 The effect of dividend policy on market price of
share is also considered.

8. Disadvantages:
 It is a prescriptive idea.
 The objective of wealth maximisation is not
socially desirable.
 There is some controversy as to whether the
objective is to maximise the shareholder’s wealth
or the firms wealth which includes other financial
claim holders.