Goals/Objectives of the Corporation

Shareholders are the owners of a corporation, and they purchase stocks because they want to earn
a good return on their investment without undue risk exposure. In most cases, shareholders elect
directors, who then hire managers to run the corporation on a day-to-day basis. Because
managers are supposed to be working on behalf of shareholders, it follows that they should
pursue policies that enhance shareholder value. Consequently, managements primary objective
is stockholder wealth maximization, which translates into maximizing the price of the firms
common stock. Firms do, of course, have other objectives e.g

Survival
Increasing market share
Profit maximisation
the managers who make the actual decisions are interested in their own personal

satisfaction,
in their employees welfare, and
in the good of the community and of society at large i.e social responsibility etc

Still, stock price maximization is the most important objective for most corporations.

Managerial Actions to Maximize Shareholder Wealth

What types of actions can managers take to maximize a firms stock price? To answer
this question, we first need to ask, What determines stock prices? In a nutshell, it is
a companys ability to generate cash flows now and in the future.
Three basic facts about financial assets that determine value of a financial asset are:
(1) Any financial asset, including a companys stock, is valuable only to the
extent that it generates cash flows;
(2) the timing of cash flows matterscash received sooner is better, because it can be reinvested
in the company to produce additional income or else be returned to investors; and
(3) investors generally are averse to risk, so all else equal, they will pay more for a stock whose
cash flows are relatively certain than for one whose cash flows are more risky.

Because of these three facts, managers can enhance their firms stock prices by increasing the
size of the expected cash flows, by speeding up their receipt, and by reducing their risk.
The three primary determinants of cash flows are
(1) unit sales,
The first factor has two parts, the current level of sales and their expected future growth rate.
Managers can increase sales, hence cash flows, by truly understanding their customers and then
providing the goods and services that customers want. Some companies may luck into a situation
that creates rapid sales growth, but the unfortunate reality is that market saturation and
competition will, in the long term, cause their sales growth rate to decline to a level that is
limited by population growth and inflation. Therefore, managers must constantly strive to create
new products, services, and brand identities that cannot be easily replicated by competitors, and
thus to extend the period of high growth for as long as possible.
(2) after-tax operating margins
The second determinant of cash flows is the amount of after-tax profit that the company can keep
after it has paid its employees and suppliers. One possible way to increase operating profit is to
charge higher prices. However, in a competitive economy, higher prices can be charged only for
products that meet the needs of customers better than competitors products. Another way to
increase operating profit is to reduce direct expenses such as labor and materials. However, and
paradoxically, sometimes companies can create even higher profit by spending more on labor and
materials. For example, choosing the lowest-cost supplier might result in using poor materials
that lead to costly production problems. Therefore, managers should understand supply chain
management, which often means developing long-term relationships with suppliers. Similarly,
increased employee training adds to costs, but it often pays off through increased productivity
and lower turnover. Therefore, the human resources staff can have a huge impact on operating
profits.

(3) capital requirements.

The third factor affecting cash flows is the amount of money a company must invest in plant and
equipment. In short, it takes cash to create cash. For example, as a part of their normal
operations, most companies must invest in inventory, machines, buildings, and so forth. But each
dollar tied up in operating assets is a dollar that the company must rent from investors and pay
for by paying interest or dividends. Therefore, reducing asset requirements tends to increase cash
flows, which increases the stock price. For example, companies that successfully implement justin-time inventory systems generally increase their cash flows, because they have less cash tied up
in inventory.
(4)Financing decisions
Financial managers also must decide how to finance the firm: What mix of debt and equity
should be used, and what specific types of debt and equity securities should be issued? Also,
what percentage of current earnings should be retained and reinvested rather than paid out as
dividends? Each of these investment and financing decisions is likely to affect the level, timing,
and risk of the firms cash flows, and, therefore, the price of its stock. Naturally, managers
should make investment and financing decisions that are designed to maximize the firms stock
price.
External factors that affect stock prices
Although managerial actions affect stock prices, stocks are also influenced by such external
factors as legal constraints, the general level of economic activity, tax laws, interest rates, and
conditions in the stock market. Working within the set of external constraints management makes
a set of long-run strategic policy decisions that chart a future course for the firm. These policy
decisions, along with the general level of economic activity and the level of corporate
income taxes, influence expected cash flows, their timing, and their perceived risk.
These factors all affect the price of the stock, but so does the overall condition of the financial
markets. As these examples indicate, there are many ways to improve cash flows. All of them
require the active participation of many departments, including marketing, engineering, and
logistics. One of the financial managers roles is to show others how their actions will affect the
companys ability to generate cash flow.