Which one of the following best states the primary goal of financial management?

Question

BlackTom AI · Accepted Answer

Maximizing shareholder wealth is the guiding principle: the primary goal of financial management is to maximize the current value per share because market value reflects investors’ evaluation of expected future cash flows, timing, and risk.

1) Relevant knowledge points and concepts
- Shareholder wealth maximization: decisions should increase the market price of the firm’s stock.
- Present value principle: stock value = present value of expected future cash flows (dividends or free cash flow).
- Net present value (NPV): accept projects with NPV > 0; NPV = Σ (CFt / (1 + r)^t) − initial investment.
- Trade-offs: dividends, risk, timing of cash flows, and growth affect share value; short-term measures (dividends, profits) may conflict with long-term value.

2) Step-by-step reasoning
- The stock price equals the discounted sum of expected future cash flows: P0 = Σ (CFt / (1 + r)^t). Any firm decision should increase P0.
- Financial managers choose investments and financing that increase expected CFt, reduce risk (lower r for a given CFt), or accelerate receipt of cash flows, thereby increasing P0.
- Projects with positive NPV raise expected future cash flows net of cost and thus raise P0; negative NPV projects reduce P0.

3) Intermediate steps / formulas
- Present value expression: P0 = Σ (CFt / (1 + r)^t).
- NPV rule: NPV = Σ (CFt / (1 + r)^t) − I0. If NPV > 0 → increases shareholder wealth → increases P0.

4) Why the correct answer is correct
- "Maximize the current value per share" directly targets P0 and therefore shareholder wealth, incorporating timing, risk, and expected returns. It aligns managerial decisions with owners’ interests and uses the PV/NPV framework.

5) Why other options are incorrect
- "Maximize current dividends per share": ignores reinvestment and value-creating projects; high dividends can reduce long-term value.
- "Increase cash flow and avoid financial distress": important but too narrow; cash flow quality and timing matter; avoiding distress is a constraint, not the primary goal.
- "Minimize operational costs while maximizing firm efficiency": operational efficiency is a means, not the ultimate objective.
- "Maintain steady growth while increasing current profits": steady growth/profits might not maximize share value if risk/timing make projects value-destroying.

6) Conclusion
Thus the best-stated primary goal is to maximize the current value per share, which matches the provided answer.

Which one of the following best states the primary goal of financial management?单项选择题

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