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ACCA Strategic Professional · Advanced Financial Management · Strategic business and financial planning for multinational organisations

Which of the following best describes why shareholder wealth maximisation is the primary financial objective of a multinational company in AFM?

Shareholder wealth maximisation is the main objective because shareholders are residual claimants who receive returns only after other claims are met. Maximising the risk-adjusted present value of their future cash flows reflects long-term success, unlike short-term earnings measures, which ignore risk and timing.

  1. AShareholders are residual claimants whose returns depend on cash flows after all other stakeholders are paid, so value creation for them reflects long-term corporate successCorrect
  2. BShareholders are the only stakeholders with legal rights against the company
  3. CMaximising reported earnings per share each year guarantees maximum shareholder wealth
  4. DShareholder wealth is easier to measure than profit because it ignores risk

Explanation

Shareholders bear residual risk and are paid last, so maximising the present value of future cash flows to them, adjusted for risk, aligns decisions with long-term value. Option B is wrong because creditors and others also hold legal rights. Short-term EPS can be manipulated and ignores risk and timing.

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