Publish On: 2019-04-23

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Question: What is shareholders wealth maximisation

Reply On: 2013-09-02


Total Post: 8

ANS: What is shareholders wealth maximisation

Shareholders wealth maximisation means maximizing the net present value of a course of action to shareholders. Net present value (NPV) or wealth of a course of action is the difference between the present values of its benefits and the present value of it costs. A financial action that has a positive NPV creates wealth for shareholders and therefore, is desirable. A financial action resulting in negative NPV should be rejected since it would destroy share holders wealth, between mutually exclusive projects the one with the highest NPV should be adopted. NPVs of a firm’s projects are additives in nature. That is   

NPV (A) + NPV (B) = NPV (A + B)

This is referred to as the principle of value-additivity. Therefore the wealth will be maximized if NPV criterion is followed in making financial decisions.


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