The simple profit-maximisation model of the firm has provided decision makers with useful insights. However, the profit-maximisation model is limited because it does not incorporate the time dimension in the decision process and it does not consider risk. The shareholder wealth-maximisation model of the firm overcomes these limitations.
The shareholder wealth-maximisation goal states that the objective of a firm’s management should be to maximise the present value of the expected future cash flows to the equity owners (shareholders). For simplicity, at this point let us consider cash flows to be the same as profits. Hence, the value of a firm’s stock is equal to the present value of all expected future profits, discounted at the shareholder’s required rate of return.
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