Increasing which TWO of the following would be associated with the financial objective of
shareholder wealth maximization?
O Share price
O Dividend payment
O Reported profit
O Earnings per share
O Weighted average cost of capital
I was among three options: share price, dividend payment and EPS. The correct answer is share price and dividend payment. The model answer said the EPS is not directly linked to shareholders' wealth. However, I thought if EPS increases then shareholders' wealth would also increase and it is even more direct to shareholders' return than the share price.
Can you please explain?
Thank you in advance,
Iniss.
Ask the Tutor ACCA FM
Shareholders' wealth maximization
2y ago#1Increasing the share price and increasing the dividend payment would be associated with the financial objective of shareholder wealth maximization.
Shareholder wealth is measured by the market value of shares, and an increase in share price directly contributes to increasing shareholder wealth. Dividend payment is another way to enhance shareholder wealth as it provides a direct return to shareholders.
Reported profit and earnings per share are not directly linked to shareholder wealth maximization. While they may be important indicators of a company's financial performance, they do not necessarily translate into increased shareholder wealth.
The weighted average cost of capital (WACC) is a financial metric used to assess the cost of financing for a company. While it is an important consideration for financial decision-making, it is not directly associated with shareholder wealth maximization.
But I have done another question (ques 8 BPP Revision Kit p.4):
Are the following true or false?
+ Maximizing market share is an example of a financial
objective
+ Shareholder wealth maximization is the primary financial
objective for a company listed on a stock exchange
+ Financial objectives should be quantitative so that their
achievement can be measured
This time the answer said the first statement is false as maximising market share is not a financial objective. This has caused me some confusion against the previous question.
Oh sorry, I made a mistake between share price and market share. Thanks for your explanation!
2y ago#4You are most welcome
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