CIMA F3 Syllabus A. Financial policy decisions - Financial objectives and corporate strategy - Notes ^{10 / 12}

Maximisation of shareholder wealth is measured by the share price (if the company is listed of course).  This is because the share price is simply the value of all future dividends coming to the shareholders.

However, sometimes a business reports a profit increase and the share price falls due to the manner in which they made the profit. This suggests that that profit is not sufficient as a business objective

Share price could also rise and fall due to potential investment decisions or the fact that a new loan is being taken out or that dividends are to be increased or lowered.

Some strategies to enhance shareholder wealth include:
- Investment in projects with a positive Net Present Value
- Enhancing brand reputation and recognition
- Moving profitable operations to low tax regimes

Corporate Strategies

Clearly corporate strategies are wider than purely financial, they look at the business as a whole. Once these are set appropriate financial objectives can then be set and measured

Examples include:

• Return on investment
  Market share
  Growth
  Customer satisfaction
  Quality

Financial Objectives

The purpose of financial objectives is to communicate plans and help forecast performance, publicise and communicate direction to internal management and external stakeholders, and to control performance and direction of the organisation by exception reporting.

Examples include:

1. Profit Maximisation

   Focusing on profits could mean undue risk and short termism. 

   Also there is the problem that profits can be manipulated using financial accounting, unlike cash. 

   So maybe profit maximisation focuses on financial profit too much and not enough on cash generation.

2. Earnings Per Share Growth

   This still uses earnings (profits) rather than cash unfortunately.

   EPS looks at the amount of profits made in the year for each individual share. 

   Remember it is the ORDINARY shareholders who are interested in EPS. Therefore EPS is:

   (Profit after tax - preference dividends) / Weighted average Ordinary shares

Illustration

• What is the EPS in each year?

Solution

• Last year:

  Earnings (13,510 - 200) = 13,310
  EPS = Earnings 13,310 / Shares 100,000 = 13.31p

• Current year

  Earnings (14,508 - 200) = 14,308
  EPS = Earnings 14,308 / Shares 100,000 = 14.31p