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Most of the financial theory rests on the premise that the objective of the firm should be to maximize the value of the firm to its equity shareholders. This means that the objective of the firm should be to maximize the market value of its equity shares (which represents the value of the firm to its equity shareholders. The justification of the objective being wealth maximization is that; it appears to provide a rational guide for business decision-making and promote efficient allocation of resources in the economic system. Savings are allocated primarily on the basis of expected return and risk and the market value of a firm’s equity stock reflects the risk-return trade-off of investors in the market place. Hence when a firm maximizes the market value of its equity –stock , it ensures that its decisions are consistent with the risk-return preferences of investors.
Approximate Word count = 503
Approximate Pages = 2
(250 words per page double spaced)
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