Goal of the firm today is maximizing shareholders wealth, max stock price.
Stock price is affected by
cash flow size
cash flow timing
cash flow uncertainty, risk.
Manager should mazimize the value of firmís equity but there are problems concerning
income vs. cash flow,
accounting vs. finance,
book value vs. market value,
Performance measures in historical perspective:
profit margin %
total profits, profit growth
return on assets %
shareholder value (EVA, CFROI).
free cash flow generated by company
fet cash flow generated by investments
cost of capital considered
Drivers of shareholder value:
out of fewer assets
at lower risk
for as long as possible.
Do managers maximize shareholder wealth?
Agency problem represent the conflict of interest between management and owners.
1. Compensation plans
2. Board of directors
4. Specialist monitoring
The new economy is driven a few major trends:
1. The business web, electronic networking.
2. Customers are the king of the new economy.
3. Speed and execution are two strategic qualities.
4. Competition is crucial, winner take all.
5. Knowledge is the key asset of the new economy, intangibles grow in balancesheets.
6. Trends toward greater institutional investments.
7. Growing tendency to hostile takeovers.
What should be firmís right objective?
The shareholder value and stakeholder value differs in many respects:
Max the market value of a firm is single objective.
Shareholder is residual claimant on the company.
Supported however by a powerful theoretical writings,
but strong assumptions necessary.
Stakeholders are all parties that are affected by a firmís actions.
All stakeholders have claims on the company.
Multiple objectives: which one is relevant?
Even conflicting objectives?
Stakeholder value approach does not provide a guideline for managerial decision making.
Shareholder value is result, not strategy.