Will Profit Maximization Always Result in Stock Price Maximization
Some people may ask will profit maximization always result in stock price maximization? Profit maximization does not always result in stock price maximization, because profit maximization can only ensure higher earnings per share not the increased value of a stock. Profit can be manipulated by the managerial actions, like reducing operating costs through hampering the normal flow of actions.
Stock Price Maximization
Suppose managers want to show a higher profit this year, to do this they reducing operating expenses by not entertaining repair and maintenance of machines. So the cost of repair and maintenance saved. This definitely increases the profit of the organization but in the next year, the company has to spend higher operating cost for repair and maintenance which will ultimately reduce the profit.
Here manager’s action increases the profit of the firm but it will not maximize the price of stock because there is no increase in operating efficiency.
So it is clear that more earning per share does not ensure price maximization of stock in the market.
Actually, wealth maximization can create a positive effect which helps to maximize the price of the stock.
A question may arise to our mind that What does it mean to maximize the value of a corporation?
To understand and answer this type of question one thing is enough that, maximizing the value of a corporation indicates the value maximization of the wealth of a company. We can say the value of a corporation is maximized when the price of a stock is increased. Value maximization is preferable for the owner because it ensures not only the capital gain by selling stock in the market but also get profit through a dividend. It is management’s responsibility to ensure the value maximization.
Maximize the Value
In 2013 the stock price of a company or corporation was Tk 120 but in 2014 the price increase to Tk 210 in the secondary market. This indicates that company successfully utilizes its resources which actually increased the value or price of the stock.
We know that maximization of the value of a corporation is reflected by the increased value of a stock. Above example shows that there is an increase in the price of the stock, so we can say that value of a corporation is increased.
Finance is concerned with decisions about money i.e. how money or fund will be collected and use in a productive sector properly. Before 1960 it refers only the collection of funds but after that, the idea was changed.
Some People May ask what actually finance is?
Finance is not limited to a collection of funds; it must ensure proper utilization of funds.
What is Finance?
Finance is lifeblood of every corporation because we cannot do any business activity without the help of finance. Some people say that the overall activities related to planning, organizing, raising, conservation, using and controlling funds is known as finance.
According to Harvard & Upton, it is that administrative area which is concerned with the arrangement of cash and credit effectively.
It consists of three interrelated areas.
Areas of Finance
Money & Capital Market
So concluding with the idea, it is not the only collection of fund where the funding cost is lower and then utilizes it to ensure the maximum rate of return for the investors. Managing funds is not an easy task but it is management’s responsibility to manage the funds which can ensure the substantial growth of a company.