why is the shareholder wealth maximisation rule better one for corporate managers to follow than proft maximis

Question

y is the shareholder wealth maximasation rule a better one for corporate managers to follow than the profit maximisation rule?

Answer 1

Profit Maximization vs. Wealth Maximization
Frequently, maximization of profits is regarded as the proper objective of the firm, but it is not as inclusive a goal as that of maximizing shareholder wealth. For one thing, total profits are not as important as earnings per share. A firm could always raise total profits by issuing stock and using the proceeds to invest in Treasury bills. Even maximization of earnings per share, however, is not a fully appropriate objective, partly because it does not specify the timing or duration of expected returns. Is the investment project that will produce $100,000 return 5 years from now more valuable than the project that will produce annual returns of $15,000 in each of the next 5 years? An answer to this question depends upon the time value of money to the firm and to investors at the margin. Few existing stockholders would think favorably of a project that promised its first return in 100 years. We must take into account the time pattern of returns in our analysis.

Another shortcoming of the objective of maximizing earnings per share is that it does not consider the risk or uncertainty of the prospective earnings stream. Some investment projects are far more risky than others. As a result, the prospective stream of earnings per share would be more uncertain if these projects were undertaken. In addition, a company will be more or less risky depending upon the amount of debt in relation to equity in its capital structure. This risk is known as financial risk; and it, too, contributes to the uncertainty of the prospective stream of earnings per share. Two companies may have the same expected future earnings per share, but if the earnings stream of one is subject to considerably more uncertainty than the earnings stream of the other, the market price per share of its stock may be less.

For the reasons above, an objective of maximizing earnings per share may not be the same as maximizing market price per share. The market price of a firm’s stock represents the focal judgment of all market participants as to what the value is of the particular firm. It takes into account present and prospective future earnings per share, the timing, duration, and risk of these earnings, and any other factors that bear upon the market price of stock. The market price serves as a performance index or report card of the firm’s progress; it indicates how well management is doing in behalf of its stockholders.

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Answer 2

A misunderstanding is the inability to effectively communicate in a clear manner. All too often, the sender says something one-way, and the receiver interprets it another way. However, the more effective the communication, the more likely misunderstandings can be resolved when they arise. With that said, there are ways to develop better communication, which can help avoid misunderstandings. Be Specific When Communicating Say what you mean and mean what you say. It is very important to be specific when communicating with others. Never say things in a general way. If a person knows exactly what you mean, the chances of a misunderstanding can be avoided. Be Aware of Your Verbal and Non-Verbal Language Be certain to clearly convey the same verbal and non-verbal cues. Do not give mixed communication signals. Remember, body language, facial expressions, and tone of speech play an important part in how messages will be interpreted. For example, if you say something one way, and your facial expression says something else, it's very likely that a miscommunication will occur. Always Ask Questions Avoid making assumptions based on preconceived notions. Ask questions to confirm, whether you are the one sending or receiving the message. Never assume that you know what has been conveyed. If someone conveys a message that is unclear, ask for further clarification. For example, “ I did not understand what you said, can you please repeat it?” Practice Active Listening Skills Active listening is one of the best ways to effectively communicate with others. In fact, when we truly listen, misunderstandings are less likely to occur. With that in mind, there is a difference between hearing and active listening; hearing involves sound waves reaching the ears, and the brain processing what has been heard. Active listening goes far beyond that of just hearing what someone has said. It involves focus and a sincere commitment to make certain that what someone has said, is appropriately understood. This is not easy, though. The following are ways to become an active listener: •Avoid distractions •Stop all non-relevant activities •Focus on the person speaking •Be an active participant; respond to questions or comments •Encourage the speaker with your body language (lean forward or nod your head with a yes or no to indicate you understand) Effective communication is not an easy skill to master. It takes time to develop this type of competence. However, it is not unattainable. The best practice of any effective communicator is to be specific, watch all verbal and non-verbal cues, ask questions, and be an active listener. This is the key to all effective communication. Remember, you can never be too sure, too precise, or too inquisitive.