1.2 The Goal of the Firm

Whether or not a financial decision is efficient should be judged by some standards. It requires the existence of some objective or goal. In other words, what should a company achieve? The answer doesn't seem as simply that. Individuals and groups associated with the organization may have various answers to this question.

1.2.1 Stakeholders

A company's activities affect lots individuals and groups, including the followings：

·employees；

·managers；

·shareholders；

·debtholders；

·bank；

·suppliers；

·government；

·communities；

…

All are stakeholders, which may have conflicting objectives with others. For example, shareholders want to maximize the wealth which they have as a result of the ownership of the shares in the company, while employees usually want to maximize their salaries and benefits.

The actions of stakeholder groups in pursuit of their various goals have impact on setting company's overall goal. Thus, various objectives are possible as discussed later.

1.2.2 Profit Maximization

It sounds reasonable that everyone prefer to a profitable company rather than an unprofitable one. However，

·Maximizing what year's profit? No shareholders want to increase current year's profit at the expense of profit of later year.

·Profit is likely to be manipulated-different accountant calculate profit at different ways.

·Profit is not cash-based. Imagine a company intends to boost sales by easing credit standard, is that a wise decision for the shareholders？

1.2.3 Shareholders' Wealth Maximization

We assume in this book that the overriding objective of the firm is to maximize shareholder's value, which translates into maximizing the market value of the company's shares.

For public company, the wealth of shareholders is increased when the share price goes up. The price of a company's shares is a comprehensive indicator, indicating not only present profits but also the company's future growth opportunity. It takes into account present and future earning, the timing and risk of these earnings, the dividend policy, and other factors that bear on the market price of the share.