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ACCA Applied Skills · Financial Management · Stakeholders and impact on corporate objectives

Which of the following best describes why shareholder wealth maximisation is normally taken as the primary financial objective of a company?

Shareholder wealth maximisation is the primary objective because shareholders own the company and bear the residual risk. Their return comes from dividends and share price growth, so managers act in their interests by maximising that combined return, while still considering other stakeholders.

  1. AShareholders are the owners who bear residual risk, and their wealth is increased through dividends and share price growthCorrect
  2. BShareholders are legally entitled to the highest return of all stakeholders on their investment
  3. CMaximising annual profit guarantees that dividends will rise every year
  4. DMaximising shareholder wealth removes the need to consider other stakeholders

Explanation

Shareholders are the owners and bear residual risk, since they are paid after other claimants. Their wealth is the combination of dividends received and share price gains, so managers aim to maximise this. Profit maximisation does not guarantee rising dividends, and other stakeholders still matter, so the other options are wrong.

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