The primary financial objective of corporate finance is usually taken to be the maximization of

QUESTION

The primary financial objective of corporate finance is usually taken to be the maximization of shareholder wealth. Discuss what other objectives may be important to a public limited company and whether such objectives are consistent with the primary objective of shareholder wealth maximisation.
The object of the Corporate Finance is the acquisition and allocation of corporate funds or resources with the maximizing shareholders wealth. In the financial management of a corporation funds are generated from various sources and allocated or invested for desired assets. The primary function of corporate finance is resource acquisition, refers to the generation of funds from both internal and external sources at the lowest possible cost to the corporation. There are two main categories of resources are equity (shares) and liability (borrowings). The equities are proceeds from the sale of stock, returns from investments and retained earnings. Liabilities include bank loans or other debts, accounts payable, product warranties and other types of commitments from which an entity derives value. The second function of corporate finance is resources allocation and investment of funds with the intent of increasing share holders wealth over a period of time. There are two basic categories investments are current assets and fixed assets. Current assets include cash, inventory and accounts receivable. The fixed assets are buildings, real estate and machinery. In addition, the resource allocation function is concerned with intangible assets such as goodwill, patents and brand names. It is the duty of financial manager of a corporation to conduct the above functions in a manner that maximizes shareholders wealth or stock price and he must balance the interests of owners or shareholders

and creditors including banks and bondholders and other parties, such as employees, suppliers and customers. For example a corporation may choose to invest its resources in risky ventures in an effort to offer its share holders the potential for large profit. However, risky investments may reduce the perceived security of the companies bond, thus decreasing their value in the firm must pay to borrow money in the future. Conversely, if the corporation invests too conservatively, it could fail to maximize the value of its equity. If the firm performs better than other companies its stock price will rise, in theory, enabling it to raise additional funds at a labour cost, among other benefits. Practical issues and factors influenced by corporate finance include employees salaries, marketing strategies customer credit and the purchase of new equipment. The Financial decision affects both the profitability and risk of a firms operation. An increase in cash holdings, for instance risk, but, because of cash is not an earning asset, converting other types of assets to cash reduces the other firms profitability. Similarly, the issue of additional debt can raise the profitability of a firm, but more debt means more risk. Striking a balance between risk and profitability that will maintain the long term value of a firms securities in the large of finance

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