Lecture-1-Understanding+Public+Financial+Management

From the stockholders perspective a good from

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Unformatted text preview: ead to an increase in the value of the stock. This is because investors generally prefer more wealth This to less. Thus, the financial goal of the firm is to maximize shareholder wealth as reflected in the market price of the stock. The term shareholders refers to the firm’s current The owners or stockholders. owners 34 34 34 In practice, this goal means that the financial manager In can best serve business owners by identifying goods and services that add value to the firm because the marketplace desires and values the firm’s offerings. This single-valued objective serves as a prerequisite This for rational behavior within an organization. In fact, maximizing shareholder wealth has become the premier business mantra. mantra Shareholder wealth maximization rests on several Shareholder assumptions. The corporate objective function assumes that managers operate in the best interests of stockholders, not themselves, and do not attempt to expropriate wealth from lenders to benefit 35 35 35 stockholders. stockholders. Shareholder wealth maximization also assumes that Shareholder managers do not take actions to deceive financial markets in order to boost the price of the firm’s stock. Another assumption is that managers act in a socially Another responsible manner and do not create unreasonable costs to society in pursuit of shareholder wealth maximization. This implies that the financial manager should not take This illegal or unethical actions to increase the value of the equity owners. equity Given these assumptions, shareholder wealth Given maximization is consistent with the best interests of stakeholders and society in the long run. stakeholders 36 36 36 Accounting profit is the difference between revenues and Accounting usually only explicit costs, recorded according to accounting principles. An explicit cost is a direct payment made to others in the An explicit course of running a business such as wage, rent and materials. Accounting costs generally do not include implicit materials Accounting costs, which are the returns the employed resource would have earned in its next best use. Implicit costs include opportunity costs associated with a Implicit firm’s equity, costs of assets used in production, and ownerfirm’s provided services. provided For example, the opportunity cost of equity capital is the implied For rate of return that investors could earn by investing these funds elsewhere. elsewhere. 37 37 37 Economic profit is the difference between revenues and Economic total costs (explicit and implicit costs, including the normal rate of return on capital). Normal profit is the minimum rate of return that investors are Normal willing to accept for taking the risks of investment. By earning revenues in excess of its total costs, the firm has an economic profit. When revenues equal total costs, economic profit is zero. This When does not mean, however, that investors are receiving no returns. Instead, investors are get...
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This note was uploaded on 02/11/2014 for the course FIN 9891 taught by Professor Wu during the Fall '11 term at Kazakhstan Institute of Management, Economics and Strategic Research.

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