Investment decisions & Finance decisions
Corporations face two principal financial decisions.First, what investments should be the corporation make? Second, how should it pay for the investments? The first decision is the investment decision; the second is the financing decision. However, financial managers have obligations for decisions which have determined. For example, they should manage assets already in place and decide when to shut down etc or meet obligations to banks, bondholders and stockholders that contributed financing in the past, such as repaying debt or paying dividends.
Why should FM maximize shareholder value ?
- Each stockholder wants three things
- To be as rich as possible, that is, to maximize his or her current wealth.
- To transform that wealth into the most desirable time pattern of consumption either by borrowing to spend now or investing to spend later.
- To mange the risk characteristics of that consumption plan.
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But stockholders do not need the financial manager's help to achieve the best time pattern of consumption. They can do that on their own, provided they have free access to competitive financial markets. They can also choose the risk characteristics of their consumption plan by investing in more- or less-risky securities.
PS：Both of the assumptions are unavailable in China, hence, FM may focus on this part.
Hence, the only way to help firms' stockholders is increasing their wealth. That means increasing the market value of the firm and the current price of its shares.
PS: This argument leads to another important question Why does not this mean maximize profits ?
A: Which year's profits? A corporation may be able to increase current profits by cutting back on outlays for maintenance or staff training. By contrast, a corporation may be able to increase future profits by cutting this year's dividend and investing the freed-up cash in the firm.
