The fundamental goal of a business is to create value for the company’s owners (i.e., its shareholders). This goal is frequently stated as “maximization of shareholder wealth.” Thus, the goal of the financial manager is to create wealth for the shareholders by making decisions that will maximize the price of the existing common stock. Not only does this goal directly benefit the shareholders of the company, but it also provides benefits to society as scarce resources are directed to their most productive use by businesses competing to create wealth.

We have chosen maximization of shareholder wealth—that is, maximizing the market value of the existing shareholders’ common stock—because all financial decisions ultimately affect the firm’s stock price.

Investors react to poor investment or dividend decisions by causing the total value of the firm’s stock to fall, and they react to good decisions by pushing up the price of the stock. In effect, under this goal, good decisions are those that create wealth for the shareholder.

Concept Check 

1. What is the goal of the firm?

2. How would you apply this goal in practice?