Objectives in Corporate Finance Essay

If you dont know where you atomic number 18 going, it does non matter how you get there Aswath Damodaran Stern School of patronage Aswath Damodaran 2 First Principles Invest in projects that yield a refund greater than the minimum acceptable overleap rate. The hurdle rate should be higher for riskier projects and reflect the financing mix used owners funds (equity) or borrowed money (debt) Returns on projects should be measured based on gold flows generated and the timing of these cash flows they should also consider both positive and controvert side effects of these projects.Choose a financing mix that minimizes the hurdle rate and matches the assets being financed. If there ar not enough investments that net the hurdle rate, return the cash to the owners of the quick (if public, these would be tiredholders). The form of returns dividends and stock buybacks will depend upon the sh areholders characteristics. Objective Maximize the Value of the Firm Aswath Damodaran 3 The Classical ViewpointVan Horne In this book, we assume that the objective of the smashed is to maximize its observe to its stockholders Brealey & Myers Success is usually judged by honor Shareholders are made better off by any conclusiveness which increases the value of their stake in the firm The secret of success in financial management is to increase value.The most important theme is that the objective of the firm is to maximize the wealth of its stockholders. Brigham and Gapenski Throughout this book we operate on the supposition that the managements primary goal is stockholder wealth maximisation which translates into maximizing the cost of the common stock. Aswath Damodaran 4 The Objective in termination Making In traditional corporate finance, the objective in decision making is to maximize the value of the firm. A narrower objective is to maximize stockholder wealth. When the stock is traded and markets are viewed to be efficient, the objective is to maximize th e stock bell. only other goals of the firm are intermediate ones leading to firm value maximization, or operate as constraints on firm value maximization. Aswath Damodaran 5 The Criticism of Firm Value Maximization Maximizing stock price is not incompatible with meeting employee needs/objectives. In particular Employees are often stockholders in many firms Firms that maximize stock price chiefly are firms that have treated employees well. Maximizing stock price does not mean that customers are not critical to success.In most businesses, retention customers happy is the route to stock price maximization. Maximizing stock price does not imply that a company has to be a well-disposed outlaw. Aswath Damodaran 6 Why traditional corporate financial theory focuses on maximizing stockholder wealth. Stock price is easily observable and continuously updated (unlike other measures of performance, which may not be as easily observable, and surely not updated as frequently). If investo rs are rational (are they? ), stock prices reflect the firmness of decisions, short term and long term, instantaneously.