CA Final · Integrated Business Solutions (Multidisciplinary Case Study with Strategic Management) · Advanced Financial Management

Case: Kaveri Agro Foods Ltd, a listed Indian company, has a stated financial policy of keeping debt-equity at 0.5:1 and funding growth mainly through retained earnings. The board is reviewing its objective of maximising shareholder wealth. Which of the following measures best reflects wealth maximisation for Kaveri's shareholders, as against profit maximisation?

Wealth maximisation is best reflected by the rise in market price of the share plus dividends received, because it incorporates the timing, size and risk of returns. Profit or EPS growth ignores time value and risk, so it can mislead.

AGrowth in earnings per share over the next year
BIncrease in the market price of the share along with dividends receivedCorrect
CHigher absolute profit after tax this year
DLower borrowing cost on term loans

Explanation

Shareholder wealth is measured by market value of equity, i.e. share price appreciation plus dividends, which captures timing and risk of cash flows. Profit or EPS figures ignore risk and time value, so they are weaker measures.

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