Maximization of the wealth of equity shareholders
Are there other aims, besides the aim or maximum shareholders wealth, expressing the shareholders viewpoint?
Several alternatives have been suggested for this, such as maximization of profit, maximization of earnings per share, maximization of equity which is defined as equity earnings/ net worth.
Maximization of profit is not as all-encompassing a goal as maximization of shareholder wealth. It undergoes from several limitations:
- A profit total term is not an appropriate guide to decision making. It should be articulated on a per share basis or connected to investment.
- It leaves considerations of timing and length not defined. There is no guide for balancing present profit with future profit for comparing profit streams of different durations.
- It luster over the factor of risk. It cannot, usually, discriminate between an investment project which generates a certain profit of Rs. 50,000 and an investment project which has a variable profit outcome with an predictable value of Rs 50,000.
The aim of maximization of earnings per share and maximization of return on equity do not suffer from the first limitation mentioned. They, anyhow, suffer from the other limitations and thus are not suitable.
In view of the shortcomings of the alternatives, maximization of the wealth of equity shareholders comes into view to be the most suitable aim for financial decision making. Although the strict validity of this aim rests on certain stiff assumptions about capital markets, it can be logically defined as a guide for financial decision making under fairly plausible assumptions.