Most companies are owned by shareholders and originally set up to make money for those shareholders.
The primary objective of most companies is to MAXIMIZE SHAREHOLDER WEALTH.
Shareholder wealth maximization is a fundamental principle of financial management.
An alternative objective of the companies is profit maximization.
There are a number of potential problems with taking this approach:
Not cash based (ignore time value of money)
1. Profit Maximization is a Short-Term Concept
ABC Co. is currently earnings $30 million. ABC Co. intends to increase its earnings to $50 million, either by reducing its investment in research and development (R&D) or by postponing major repairs. The reduction in investment in R&D or postponement in major repairs may result in a future decline in sales and profits.
Timing of returns refers to how quickly a firm earns a return from an investment in fixed assets.
According to the time value of money, the earlier you get the earnings, the higher the value of money and vise-versa.
Assume that ABC Co. has two investment alternatives:
According to the profit maximization approach, Project A is equal to Project B since both projects are generating earnings of $250,000.
根据利润最大化方法，项目 A 等于项目 B，因为这两个项目都产生了 250,000 美元的收益。
Rationally, these two projects are not equal because the sooner the earnings are received, they can be invested to earn returns. This is based on the time value of money.
From the above illustration, it is clear that Project A is better than Project B since it earns returns earlier.
Assume that ABC Co. has two alternative projects generating the following earnings:
Project X ($)
Project Y ($)
Assume that the earnings can be reinvested at 10% per year.
8,800 + 6,000
16,280 + 4,000
4,400 + 6,000
11,440 + 8,000
From the illustration above, it is observed that even though both projects provide the same total earnings of $18,000, Project X is better because the larger cash flows that occurred earlier would result in a higher return of $20,280 (if it was reinvested at 10% per year). 从上图可以看出，即使两个项目提供相同的 18,000 美元的总收益，但项目 X 更好，因为较早发生的较大现金流将导致更高的 20,280 美元回报（如果以 10% 的利率再投资）年）。
3. Profit Maximization Ignores Risk3. 利润最大化忽略风险
Risk is defined as the possibility that something unpleasant would occur or the probability that the actual results would differ from the expected results. 风险被定义为发生不愉快事情的可能性或实际结果与预期结果不同的可能性。
Let’s assume that ABC Co. is considering investing in either of these products, G or H. The forecasted earnings of products G and H over the next six years are given below: 假设 ABC Co. 正在考虑投资 G 或 H 产品中的任何一个。 G 和 H 产品在未来六年的预测收益如下：
Product G ($)
Product H ($)
From the above table, you would have determined that the total forecasted earnings of Product G and Product H are $75,000 and $69,000 respectively.
从上表中，您可以确定产品 G 和产品 H 的总预测收益分别为 75,000 美元和 69,000 美元。
A profit maximization approach would favor Product G over Product H because its total projected earnings after six years are higher.
利润最大化方法将有利于产品 G 而非产品 H，因为其六年后的总预期收益更高。
However, if Product G is more risky than product H, then the decision is not as straightforward as the figures seem to indicate, because of the trade-off between risk and return.
然而，如果产品 G 比产品 H 的风险更大，那么决策并不像数字所显示的那么简单，因为需要在风险和回报之间进行权衡。
Shareholders would expect higher returns from a riskier investment to compensate for the comparatively higher level of risk taken in making Product G.
股东会期望从风险较高的投资中获得更高的回报，以补偿制造 G 产品所承担的相对较高的风险水平。
Let’s assume that ABC Co. is considering two mutually exclusive projects. The earnings with reference to the economic conditions are given as follows: 让我们假设 ABC Co. 正在考虑两个相互排斥的项目。参考经济状况的收益如下：
According to the profit maximization approach, Projects A and B are equivalent because the average earnings for both products are $300,000根据利润最大化方法，项目 A 和 B 是等价的，因为这两种产品的平均收益都是 300,000 美元
However, the two projects are not equivalent to each other because Project B has a high degree of uncertainty, as it may not be able to make any profits if the economy is in a recession.但是，这两个项目并不等同，因为项目B具有高度的不确定性，如果经济陷入衰退，它可能无法获得任何利润。
OVERVIEW OF THE FINANCIAL SYSTEM金融体系概览
T he purpose of the financial system is to bring together individuals, businesses, and government entities (economic units) that generate and spend funds. 金融体系的目的是将产生和支出资金的个人、企业和政府实体（经济单位）聚集在一起。
The short maturity ensures that the value of these securities will be relatively insensitive to interest rate changes, and also there is not much time for the issuer's condition to change; this also limits the risk
Low default risk implies that the promised cash flows will in all likelihood be paid in full and on time
For Institution Investors (Not Individual Investors):
The market has developed for institutional investors because institutional investors have large enough quantities of money to make it costly for them to not invest their excess funds.
The capital market (securities markets) is the market for securities, where companies and the government can raise long-term funds
T he process of selling new issues to investors is called underwriting. In the case of a new stock issue, this sale is an initial public offering (IPO) 向投资者出售新股的过程称为承销。在新股发行的情况下，此次出售是首次公开募股 (IPO)
I n the secondary market, securities are sold by and transferred from one investor or speculator to another. It is therefore important that the secondary market be highly liquid and transparent在二级市场上，证券由一个投资者或投机者出售和转让给另一个投资者或投机者。因此，二级市场的高度流动性和透明度非常重要