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THE FINANCIAL OBJECTIVE

IN WIDELY HELD
CORPORATIONS
ALOK JYOTI PAUL (13PGP060)
AMAN ANSHU(13PGP061)
AMRIT JAIN (13PGP062)
ANIRUDDH MUKERJI
(13PGP063)

INTRODUCTION
In a widely held corporation, the ownership is held by a large
and diverse group of people
Control is wielded by a small group of professional managers.
Managers are hence not the hired hand of the owners, they
have their own interests which may be different from that of
the owners
Owners objective is to maximize share value and the
managements objective is to manage the cash-flows.
Management sees the contribution of the ownership as only
maintaining the people in office and marginally contributing
to requirement of new equity capital.
Prof. Robert N Anthony of HBS says that profit maximizing is
not only short-lived and difficult to achieve but also immoral.

MANAGEMENT ENDS
Multiple factions ensure corporations continued existence.
Customer, labor, supplier, banker, and stockholder.
All these factions contribute to the overall financial power
of the firm.
The co-operation of the customers.
The confidence of the bankers.
The firms management should hence employ available
incentives at his disposal to secure the co-operation of the
factions.
The business would be unsustainable if consumption by
the firm is more than above stated investment .

MANAGEMENT MEANS
Edward Banfields emphasis is on long term
financial power .
Customer wants high quality at low price
Workers want decent working conditions at
highest possible wages.
The financial needs of the various factions needs
to be met with cash else they would lose
confidence in the corporation.

FINANCIAL POWER
Corporations financial power cannot be assessed by seeing
the cash balances.
Cash availability over and above the operational expenses
may over or under state the corporations ability to
distribute cash.
Understated- when there is underutilized borrowing power.
Overstated- when there are liabilities which rely on the
cash in question as securities.
Cash flow from operations should be adequately more
than the debt obligations to secure the financial power
from market and other fluctuating forces.
If PV of estimated future cash-flows is insufficient to cover
the liabilities the creditors are not fully protected.

In case of rapidly growing companies more cash is


absorbed as working capital than is generated by
operations.
If expansion looks to be profitable then creditors will
step in to provide the additional funds required.
Hence inability to service debt without further
borrowing is not a bad thing for a rapidly expanding
firm.
Though it is better from a creditors point of view
that there be some margin of safety- in terms of
surplus of gross market value of the corporation
over and above its liabilities.

STOCKS, NOT FLOWS


In a rational market the aggregate value of the
common stock equals the gross market value of
the corporation less the claims of creditors.
This shows that after allowing some margin of
safety for the creditors the financial power of the
corporation actually depends on the market value
of the common stock.
Hence Financial power fluctuates with fluctuations
in the market value of stocks, rather than due to
fluctuations in operational cash-flows.

MANAGEMENTS OBJECTIVE
Financial objectives may not be the objective of
the corporation even then the relevance of
financial power would hold weight.(i.e. the value
of corporate common shares)
If management are not concerned about the
financial power and only just satisfy the creditors,
the corporations ability to serve the various
internal factions like labor, suppliers, etc. also
goes down.
Thus creditors are not just the beneficiaries but
also referees of a corporations financial power

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