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ACCA Strategic Professional · Advanced Financial Management · The role and responsibility of senior financial executive/advisor

Which of the following is the best-supported reason why shareholder wealth maximisation is usually adopted as the primary financial objective of a listed company?

Shareholder wealth maximisation is favoured because shareholders are residual claimants and share value reflects the risk-adjusted present value of expected future cash flows. This captures timing and risk, unlike current-year profit, and it addresses agency conflicts rather than assuming they do not exist.

  1. AShareholders are the residual claimants, so their return reflects the present value of all future cash flows after other claims are metCorrect
  2. BShare price is unaffected by the actions of management
  3. CProfit maximisation in the current year always maximises long-term value
  4. DShareholders have no conflicts of interest with managers

Explanation

Shareholders bear residual risk, and share value reflects the present value of expected future cash flows, adjusted for risk, so it captures timing and risk. Short-term profit maximisation can destroy value, and agency conflicts between managers and shareholders do exist.

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