Page 11 - Microsoft Word - 00 BA3 IW Prelims STUDENT.docx

Macroeconomics I – The goals and decisions of organisations

Shareholder wealth

2.1 Maximising shareholder wealth

Companies have the primary objective of maximising shareholder wealth.

This should ultimately be reflected in

 Higher share prices

 Higher dividend payments.

Attempts to measure and increase shareholder value have focussed on incorporating
three key issues:

 Cash is preferable to profit

 Exceeding the cost of capital

 Managing both long- and short-term perspectives

2.2 Short-term measures of financial performance

 (1) return on capital employed = [PBIT/average capital employed] × 100%

 (2) earnings per share = PAT/number of shares

2.3 Long-term measures of financial performance

 Estimate future long term returns (ideally cash flow)

 Convert into present value by “discounting” at the cost of capital

2.4 Share prices

 Impact of different factors on share price (e.g. good news, bad news, economic
changes)

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