What is the goal of a manager in an organisation?
The corporate objective of a manager in the study of finance is to:
1. Maximise the value of the company (ensuring high future cash flow)
2. Maximise shareholder wealth (ensuring high stock price)
Rationale:
•Individuals are utility maximisers
•Utility is a function of consumption
•Consumption is a function of wealth
•Utility maximising individuals wish to maximise their wealth
•Individuals hold part of their wealth in the form of shares in companies
•The market value of a company is represented by its share price
•The greater the market value of a company’s shares, the greater will be the wealth of its shareholders and therefore the greater will be their utility
Got it? This is a popular multiple choice question =)