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IAI Actuarial Core Principles · Business Finance · Key principles of finance

Which of the following is the most appropriate primary objective for a company's management according to standard corporate finance theory?

The standard objective is maximising the market value of shareholders' wealth. This captures the size, timing and risk of future cash flows, unlike accounting profit or EPS, which ignore risk and timing and can be distorted by accounting policy choices.

  1. AMaximising annual accounting profit
  2. BMaximising market share irrespective of cost
  3. CMaximising the market value of shareholders' wealth, taking account of the timing and risk of cash flowsCorrect
  4. DMaximising earnings per share in the next reporting period
  5. Minimising the level of debt in the capital structure

Explanation

Shareholder wealth maximisation reflects the present value of future cash flows at a risk-adjusted rate. Profit and EPS ignore timing, risk and the scale of investment, and can be manipulated through accounting choices. Market share and low debt are not value measures in themselves.

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