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Article Junction is an online blog of Sandeep Patil. Here, I share my encounters and experiences of life and would contribute articles on variety of topics; like finance, technology, health, the Internet, mobile, celebrities, etc. I shall also publish review articles on latest movies, documentaries, gadgets, products, services, so on. My attempt is to blog what I have seen, understood and learned.

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Articles published on 'Articles Junction Blog' (AJB) are written and published by Sandeep Patil. This blog is updated and maintained by my co-author and webmaster Manoj Patil. Some articles are also contributed by our guest bloggers on a timely manner. We hope you will enjoy reading our articles. We welcome you to submit your suggestions.

Welcome to Articles Junction Blog, a free information portal on variety of subjects and topics that influenced different aspects of my life.

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Shareholders Wealth Maximization Advantages, Importance, Principle, Model

Advantages of shareholders wealth maximization


The main objective of any organization is to maximize the wealth of the shareholders. It means that the financial decisions should be taken in such a way that the shareholders receive highest combination of dividends and increase in the market price of shares. This concept is also known as Value Maximization or Net Present Worth Maximization. All financial decisions are based on this concept.

Wealth Maximization in Corporate Sense refers to the maximization of a market price of shares. Market price is an indicator of progress, prosperity, profitability, productivity and prospects of a business enterprise. It seems as a Performance Index.

The main objective of any organization is to maximize the wealth of the shareholders. It means that the financial decisions should be taken in such a way that the shareholders receive highest combination of dividends and increase in the market price of shares. This concept is also known as Value Maximization or Net Present Worth Maximization. All financial decisions are based on this concept.

Wealth Maximization in Corporate Sense refers to the maximization of a market price of shares. Market price is an indicator of progress, prosperity, profitability, productivity and prospects of a business enterprise. It seems as a Performance Index.

Concept, dynamics, goals, Principle of shareholders wealth maximization are given in the diagram below.

Principle of Shareholders Wealth Maximization

Image credits © Manoj Patil.

Objective, purpose, model, Importance of shareholders wealth maximization are follows:

  1. Measurement of Wealth
  2. Market Value of Shares
  3. Common Goal
  4. 3 D's Of Financial Decisions
  5. Shareholder's Expectations

1. Measurement of Wealth


The main Principle of financial management is the Maximization of Shareholders Wealth. Shareholder's Wealth is measured on the basis of economic value. Economic value is based on cash flows and not profit. Economic Value is defined as: “The present value of future cash flows generated by a decision, discounted at appropriate rate of discount which reflects the degree of associated risk“.

2. Market Value of Shares


The future cash flow is estimated for the present value. The present value is the Market price of share. As Shareholder's wealth is equal to the market price of shares held by him, any increase in Market price of shares would result in an increase in Shareholder's Wealth.

3. Common Goal


The Maximization of Shareholder's Wealth is the common goal between the Shareholders and the Management. The recognition of this goal motivates the Management to allocate the available resources in an optimum way.

4. 3 D's Of Financial Decisions


The Maximization of Shareholder's wealth indicates that the Market price of share is related to three basic financial decisions:

  • The investment decisions,
  • The financing decision,
  • The dividend decision.

5. Shareholder's Expectations


Shareholder's expectations are about future cash flows based on current cash flows and projected future growth. The market price of share shows these expectations.


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