The goal of financial management is to maximize the current value of the firm's stock. Why is the goal not to maximize the future value of the firm's stock?

Quick answer:

The goal of financial management is to maximize the current value of the firm's stock rather than the future value in order to satisfy current shareholders, increase profits, and indirectly plan and work toward the future.

Expert Answers

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Financial management focuses primarily on the picture of a company's financial health at the current moment, striving to maximize the current value of the firm's stock and its payments to shareholders. Let's think about why financial management focuses on the current picture rather than on a future picture or future stock values.

First, if stock values are rising in the present moment, then the company's shareholders are making profits and are more likely to retain their stock, purchase more stock, and feel confident in the company's financial situation. This means further investments and wealth for the company. Since financial managers are generally agents of the shareholders, they want to make sure that these investors remain happy right now through a maximizing of stock value.

Further, maximizing the current value of the firm's stock involves a strong focus on the company's current profits, for profits drive stock prices. After all, no one wants to invest in a company that is not making money. Therefore, financial managers must pay close attention to the company's income and expenses and the ratio of these to make sure that profits remain high. This means focusing on the current moment to increase revenue and decrease costs rather than thinking about a future goal.

Finally, financial managers focus on the current value of the firm's stock because maximizing that in the present is one of the best ways to maximize value in the future. Building a strong, stable value today through careful planning, monitoring, decision-making, and correcting will lead to maximization in the future.

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