Shareholders’ Wealth Maximisation (SWM)

Ø Finance Functions The finance functions can be divided into three broad
categories: (1) investment decision, (2) financing decision, and (3) dividend
decision. In other words, the firm decides how much to invest in short-term
and long-term assets and how to raise the required funds.
Ø Shareholders’ Wealth Maximisation (SWM) In making financial decisions,
the financial manager should aim at increasing the value of the shareholders’
stake in the firm. This is referred to as the principle of Shareholders’
Wealth Maximisation (SWM).
Ø Wealth Wealth is precisely defined as net present value and it accounts for
time value of money and risk.
Ø Agency Problem and Agency Costs Shareholders and managers have the
principal-agent relationship. In practice, there may arise a conflict between
the interests of shareholders and managers. This is referred to the agency
problem and the associated costs are called agency costs. Offering
ownership rights (in the form of stock options) to managers can mitigate
agency costs.