BUS650: Managerial Finance
Professor Leon Daniel Jr.
August 26, 2013
According to Gitman, the goal of the firm, and therefore of all managers and employees, is to maximize the wealth of the owners for whom it is being operated (2009). The financial manager is responsible for acquiring sources of financing and allocate amongst competitive investment alternatives. The ultimate goal is to invest in projects yielding higher returns than amount of financing used to invest, so profits can be used satisfy claims and increase shareholder wealth. The issues facing financial managers are therefore to 1) increase sources of financing from investors and 2) increase shareholder wealth while maintaining a
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Increasing the market price of common stock leads to fulfilling the financial goal of shareholder wealth maximization (Byrd, J., Hickman, K., & McPherson, M., 2013), therefore it is important to look at the factors which increase common stock, such as the liquidity of securities. The financial manager must understand the liquidity of its securities, to understand the value of the company and its ability to pay back investors. If stocks are not liquid, owners will have a difficult time selling securities without offering a price reduction. With a plethora of competitive investment opportunities, potential lenders will examine alternative investments available to them and choose the investment offering promising returns. Liquid securities represent a higher value of securities and as a result, potential investors will choose liquid versus illiquid securities, which in essence, increases shareholder wealth. Lastly, efficiency of the market represents a large determine the degree of returns an investor will receive. Extremely efficient markets, much like complete competition, makes it difficult for investors to earn abnormally high returns on investments, thereby decreasing the attractiveness of the investment. The next challenge facing financial managers is the ability to balance short term and long term profits. As started, the goal of management is to maximize shareholder wealth. Shareholder wealth is determined by current