Objectives in Corporate Finance Essay

If you put one acrosst know where you be going, it does not matter how you get there Aswath Damodaran Stern School of Business Aswath Damodaran 2 First Principles Invest in projects that yield a return greater than the minimum acceptable bank vault rate. The hurdle rate should be higher for riskier projects and reflect the financing go used owners funds (equity) or borrowed money (debt) Returns on projects should be heedful based on cash flows generated and the timing of these cash flows they should also escort both positive and negative side effects of these projects.Choose a financing mix that minimizes the hurdle rate and matches the assets being financed. If there atomic number 18 not enough investments that earn the hurdle rate, return the cash to the owners of the tight (if public, these would be gillyflowerholders). The form of returns dividends and stock buybacks will depend upon the stockholders characteristics. Objective maximise the nourish of the Firm As wath Damodaran 3 The Classical ViewpointVan Horne In this book, we assume that the objective of the trusty is to maximize its shelter to its stockholders Brealey & Myers advantage is usually judged by value Sh arholders are made better finish up by any decision which increases the value of their stake in the firm The secret of success in financial management is to increase value.The near 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 assumption that the managements native goal is stockholder wealth maximization which translates into maximizing the price of the habitual stock. Aswath Damodaran 4 The Objective in Decision Making In traditionalistic 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 object ive is to maximize the stock price.All 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 conflict employee needs/objectives. In particular Employees are often stockholders in numerous firms Firms that maximize stock price generally are firms that have hardened employees well. Maximizing stock price does not mean that customers are not critical to success.In most businesses, keeping customers happy is the route to stock price maximization. Maximizing stock price does not imply that a company has to be a social outlaw. Aswath Damodaran 6 Why traditional corporate financial theory focuses on maximizing stockholder wealth. have a bun in the oven price is easily observable and constantly updated (unlike other measures of performance, which may not be as easily observable, and certainly not updated as frequently). If investors are rational (are they? ), stock prices reflect the wisdom of decisions, short term and extensive term, instantaneously.