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What Is the Appropriate Goal of a Firm?

Essay by   •  August 16, 2011  •  Essay  •  259 Words (2 Pages)  •  3,794 Views

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What is the appropriate goal of a firm?

Maximization of shareholder wealth is said to be the primary goal of a firm. The financial manager has the responsibility to act in their best interests. Since, the common stockholders are the firm's most important stakeholders to continue operate the business. This goal means that the financial manager can best serve business owners by identifying goods and services that add value to the firm because the market place desires and values what the firm offers. Firms should make a decision that would increase in the value of stocks over a period of time. A business should also outlook in the firm's responsibility to its shareholders and to environment.

Value creation occurs when we maximize the share price for current shareholders. By choosing stock price maximization as an objective allows us in making statement on the best way to pick up projects and to finance them. It also serves as a measure in the firm's performance that would take into account the present and future profit; the timing, duration, and risk of these earnings; the firm's dividend policy; and other factors affecting stock price. Thus, problem occurs when stock price are manipulated for self-interest that would harm the firm.

The objective of decision making in financial management is to maximize shareholder wealth as reflected in the market value of the stock and when making a decision, rational managers should choose the best alternative that most increases the wealth of the owners of the business or its stockholders and not of the interest of themselves.

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