By

Lokesh Kumar Varshney

PGDM Final Year
04/15/11 12:39 AM Roll No: 26 1
Lokesh Kumar Varshney, PGDM , GLA University
04/15/11 12:39 AM Lokesh Kumar Varshney, PGDM , GLA University 2
 Objectives of the firm
• Objectives are targets or goals is that a
business sets for itself to achieve the
desired position.

• They are achieved through proper

Vision and Mission.

• Financial Decisions includes two things :

»A) Return
»B) RiskLokesh
04/15/11 12:39 AM attached
Kumar Varshney, PGDM ,
GLA University
3
 Objectives of the firm
There are Two main objectives of the Firm

1st : To maximise the current value of the Share

holders wealth

2nd : To reduce the Cost of the Production etc..

04/15/11 12:39 AM Lokesh Kumar Varshney, PGDM , 4

GLA University
Objective should be sure to have
• Value Maximisation objective donot ignore
the Multi Period character of the Financial
& other decisions

• It incorporates uncertainty in some way

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GLA University
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GLA University
 Theory of Firm
• The theory of the firm is based on
the assumption that all businesses
will operate to make a profit

• Businesses face should be upward

while slopes among total cost and
revenue curves – as more is
produced costs increase and as
more is sold revenue increases

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GLA University
 Marginal costs and
revenues
• If a business has a downward sloping
demand curve revenue will rise at a
decreasing rate as production rises until
marginal revenue equals zero
• At this point any additional units don’t add
anything to total revenue
• Assuming the law of diminishing returns in
the short run total costs will eventually
start to rise at a faster rate as marginal
costs increase
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GLA University
 Marginal costs and marginal
benefits
• The point of profit maximisation is
where the difference between Total
revenue and total costs is greatest
• At the point of profit maximisation
MC = MR

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GLA University
 Additional Objectives
• There are additional objectives that a
business could pursue including:
– Growth
– Sales revenue maximisation
– Limit pricing to gain monopoly power
– Customer satisfaction
• The satisficing principal sets a
minimum acceptable level of
achievement
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GLA University
 RISK MANAGEMENT
&
WEALTH MAXIMIZATION

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GLA University
 The Goal of Management
• Maximization of shareholders’ wealth is
the dominant goal of management in the
Anglo-American world.
• In the rest of the world, this perspective
still holds true (although to a lesser extent
in some countries).
• In Anglo-American markets, this goal is
realistic; in many other countries it is not.
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GLA University
 The Goal of Management
• There are basic differences in corporate
and investor philosophies globally.

• In this context, the universal truths of

finance become culturally determined
norms.

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GLA University
 Shareholder Wealth
Maximization
• In a Shareholder Wealth Maximization
model (SWM), a firm should strive to
maximize the return to shareholders, as
measured by the sum of capital gains and
dividends, for a given level of risk.
• Alternatively, the firm should minimize the
level of risk to shareholders for a given
rate of return.

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GLA University
 Shareholder Wealth
Maximization
• The SWM model assumes as a universal truth
that the stock market is efficient.
• An equity share price is always correct because
it captures all the expectations of return and risk
as perceived by investors, quickly incorporating
new information into the share price.
• Share prices are, in turn, the best allocators of
capital in the macro economy.

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GLA University
 Shareholder Wealth
Maximization
• The SWM model also treats its definition of risk
as a universal truth.
• Risk is defined as the added risk that a firm’s
shares bring to a diversified portfolio.
• Therefore the unsystematic, or operational risk,
should not be of concern to investors (unless
bankruptcy becomes a concern) because it can
be diversified.
• Systematic, or market, risk cannot however be
eliminated.

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GLA University
 Shareholder Wealth
Maximization
• Agency theory is the study of how shareholders can
motivate management to accept the prescriptions of the
SWM model.
• Liberal use of stock options should encourage
management to think more like shareholders.
• If management deviates too extensively from SWM
objectives, the board of directors should replace them.
• If the board of directors is too weak (or not at “arms-
length”) the discipline of the capital markets could effect
the same outcome through a takeover.
• This outcome is made more possible in Anglo-American
markets due to the one-share one-vote rule.

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GLA University
 Shareholder Wealth
Maximization
• Long-term value maximization can conflict with
short-term value maximization as a result of
compensation systems focused on quarterly or
near-term results.
• Short-term actions taken by management that
are destructive over the long-term have been
labeled impatient capitalism.
• This point of debate is often referred to a firm’s
investment horizon (how long it takes for a firm’s
actions, investments and operations to result in
earnings).

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GLA University
 Shareholder Wealth
Maximization
• In contrast to impatient capitalism is
patient capitalism.
• This focuses on long-term SWM.
• Many investors, such as Warren Buffet,
have focused on mainstream firms that
grow slowly and steadily, rather than
latching on to high-growth but risky
sectors.
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GLA University
 What’s Special about
“International” Finance?
• Foreign Exchange Risk
• Political Risk
• Market Imperfections
• Expanded Opportunity Set

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GLA University
 What’s Special about
“International” Finance?
• Foreign Exchange Risk
– The risk that foreign currency profits may
evaporate in dollar terms due to unanticipated
unfavorable exchange rate movements.
• Political Risk
– Sovereign governments have the right to
regulate the movement of goods, capital, and
people across their borders. These laws
sometimes change in unexpected ways.

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GLA University
 What’s Special about
“International” Finance?
• Market Imperfections
– Legal restrictions on movement of
goods, people, and money
– Transactions costs
– Shipping costs
– Tax arbitrage

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GLA University
 What’s Special about
International Finance?
• Expanded Opportunity Set
– It doesn’t make sense to play in only
one corner of the sandbox.
– True for corporations as well as
individual investors.

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GLA University
 Goals for International Financial
Management
• The focus of the text is to equip the reader
with the “intellectual toolbox” of an effective
global manager—but what goal should this
effective global manager be working
toward?
• Maximization of shareholder wealth?
or
• Other Goals?
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GLA University
 Maximize Shareholder Wealth

• Long accepted as a goal in the Anglo-

Saxon countries, but complications arise.
– Who are and where are the
shareholders?
– In what currency should we maximize
their wealth?

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GLA University
 Other Goals

• In other countries shareholders are viewed as

merely one among many “stakeholders” of the firm
including:
– Employees
– Suppliers
– Customers
• In Japan, managers have typically sought to
maximize the value of the keiretsu—a family of firms
to which the individual firms belongs.

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GLA University
 Other Goals

• No matter what the other goals, they cannot

be achieved in the long term if the
maximization of shareholder wealth is not
given due consideration.

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GLA University
 THANKS

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GLA University