W99NOONMT.7
7.The objective of a financial manager is to maximize the wealth
of the shareholders (also known as maximizing the market value of
the assets). Why is this a better objective than maximizing
earnings? Why is it better than maximizing market share? (4)
This question is pulled from lecture 1 and question 6, W98 noon MT. Maximizing earnings is an imprecise and misdirected goal. Earnings are the yearly accounting numbers created for tax purposes. They differ from cash flows due to things like depreciation expense. Shareholders care about cash flows, not earnings, so earnings are not the right numbers to maximize. Further, which earnings do we maximize? This year’s next year’s? The value of the assets will appropriately reflect all of the future cash flows generated by those assets.
Maximizing market share is only rarely the same as maximizing shareholders’ wealth. I can maximize market share by giving the product away, but that won’t make my shareholders any better off.