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ACCA Strategic Professional · Advanced Financial Management · Financial strategy formulation

Which statement best describes why maximising shareholder wealth is normally regarded as the primary financial objective of a listed company in AFM?

Shareholder wealth maximisation is the main objective because the share price reflects the risk-adjusted present value of all expected future cash flows. It therefore captures long-term value creation, unlike short-term accounting profit or EPS, which ignore risk and timing.

  1. AShare price reflects the present value of expected future cash flows adjusted for risk, so it captures long-term value creationCorrect
  2. BMaximising reported earnings per share each year guarantees the highest share price
  3. CIt ensures that profit is distributed in full to shareholders as dividends every year
  4. DIt removes the need to consider the interests of lenders and employees

Explanation

Shareholder wealth is the market value of the shares, which reflects the risk-adjusted present value of future cash flows. Maximising short-term EPS does not guarantee a higher share price, because it ignores risk, timing and cash flows, so option B is wrong.

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