Week 01 - Conflict between shareholder wealth maximization and profit maximization

In the first week of lectures, I was able to understand what is corporate financial management, it is the way of managing a company's finances effectively and efficiently in order to achieve the organisation's goals and objectives. For further understanding of this topic I referred the website Investopedia.com where an article reviewed by Will Kenton, 2019 states the corporate financing involves Financing Divisions, investment Decisions and Dividend Decisions.  Link: 
https://www.investopedia.com/terms/c/corporatefinance.asp
The primary concern of corporate finance is to increase the shareholder value by long and short term financial planning and also by implementing different strategies. Other common corporate concerns when it comes to corporate finance are, Revenue/Sales Maximization, Profit Maximization, Survival, Market Share Dominance and Social Responsibility. However attention must also be given to the boundaries, looking through the Anglo American lens companies focus on boundaries such as the company owned by the shareholders, liability of shareholders for companies actions is restricted to the value of shareholders investment, shareholders have a say in a companies management, can appoint and remove directors, must be consulted before important decisions are to be made, can sell or pass their ownership. 
https://www.youtube.com/watch?v=LmO_he3EXbY
Furthermore referring to this video i was able to understand goals of financial management - profit maximization vs wealth maximization.
The below image explains the conflicts of profit maximization and wealth maximization.

Image result for profit maximization and wealth maximization
After considering the boundaries the ultimate concern for corporate finance will be maximizing shareholder wealth from an Anglo American Perspective. This is also known as Shareholder Primacy Norm SPN. Wealth maximization is known as increasing the value of a company in order to increase the value of the shares held by shareholders. The main difference between profit maximization and wealth maximization is that profit maximization focuses on short term earnings, while the wealth maximization focus is on increasing the overall value of the business entity over time. Responsibility in Corporate Financing is where the Financial Managers achieve corporate financial sustainability where practices and systems are put in places to protect the organization from reckless financial decisions.   


Comments

Post a Comment

Popular posts from this blog

Week 02 - Shareholder Value Creation

Image
In the second week of lectures, we were given the topic of International Value Management. Value management is the managing of shareholder value. The key components of Value Management are Organisational capabilities, strategy and finance. traditional methods used to measure performance are Earnings per share and Return on capital employed (ROCE). Earning per share is calculated by dividing profit, net of tax, dividends to shareholders by the amount of ordinary shares outstanding. This shows the amount each shareholder gets if all the net income is distributed among them which usually doesn't happen and instead they are reinvested in the business. ROCE, on the other hand, means the profitability ratio of a company it is measured by comparing the profitability and the capital employed. Moreover, the lecturer briefly explained us about shareholder value creation/destruction, in highly volatile and complicated marketplace, it is important to create shareholder value which can lea
Read more

Week 05 - Equity capital, debt capital, CAPM and WACC

In the fifth week of lectures the lecturer explained us about the equity capital, debt capital, cost asset pricing model and weighted average cost of capital. Equity capital is funds paid into a business by investors in exchange for common or preferred stock. This represents the core funding of a business, to which debt funding may be added. Once invested, these funds are at risk at risk, since investors will not be rapid in the event of a corporate liquidation until the claims of all other credits have first been seen settled. Despite this risk, investors are willing to provide equity capital for one or more of the following reasons: Owing a sufficient number of shares gives an investor some degree of control over the business in which the investment has been made.  The investee may periodically issue dividends to its stockholders The price of the shares may appreciate over time, so that investors can sell their shares for a profit Debt capital is knows as a part of t
Read more

Week 04 - Modern portfolio theory

Image
In the fourth week of lectures we were taught on the topic modern portfolio theory. This theory is an investment theory, based on the idea that risk-averse investors can create portfolios to max out the expected return based on a given level of market risk  considering that this risk is part of the reward.  This is one of the most important theories behind finance and investments. Another factor that this theory suggests is that investors given two portfolios would prefer the less risky one over the other. Therefore this suggests that investors will be willing to go for high risk portfolios if the return is fairly high compared to the other. this means that an investor must undergo a higher risk if they are aiming for a higher reward.  The same theory applies for each and every investor. Each investor will evaluate this theory in many different ways. A method which could be used to reduce the portfolio risk would be  by holding combinations of instruments that are not perfectly posit
Read more