Shareholder wealth maximisation (share price)
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
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
Return on investment
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.
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
What is the EPS in each year?
|Last year||Current year|
|Profits before interest and tax||22,300||23,726|
|Profits after tax||13,510||14,508|
|Number of ordinary shares issued||100,000||100,000|
Earnings (13,510 - 200) = 13,310
EPS = Earnings 13,310 / Shares 100,000 = 13.31p
Earnings (14,508 - 200) = 14,308
EPS = Earnings 14,308 / Shares 100,000 = 14.31p