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CS Executive · Corporate Accounting and Financial Management · Introduction to Financial Management

In financial management, 'wealth' of shareholders under the wealth maximisation objective is best measured by:

Shareholder wealth is measured by the present value of the firm's expected future cash flows, which is reflected in the market price of its shares. Single-year profit, EPS or book value do not capture the timing and risk of future returns, so they are weaker measures.

  1. ANet present value of the firm's future cash flows reflected in the market price of its sharesCorrect
  2. BTotal accounting profit after tax reported in the latest year
  3. CBook value of the firm's total assets less outside liabilities
  4. DEarnings per share of the current year only

Explanation

Shareholder wealth is the present value of expected future cash flows to owners, shown through the market price of shares. Accounting profit and EPS for one year ignore time value and risk, and book value does not reflect market expectations.

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