THE FINANCIAL OBJECTIVE IN WIDELY HELD CORPORATIONS

THE FINANCIAL OBJECTIVE IN WIDELY HELD CORPORATIONSALOK JYOTI PAUL (13PGP060)AMAN ANSHU(13PGP061)AMRIT JAIN (13PGP062)ANIRUDDH MUKERJI (13PGP063)ANKIT SAXENA (13PGP064)

INTRODUCTIONIn 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 ownersOwners 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 ENDSMultiple 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 MEANSEdward Banfields emphasis is on long term financial power .Customer wants high quality at low priceWorkers 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 POWERCorporations 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 FLOWSIn 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 OBJECTIVEFinancial 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