The Classical Objective

There is general agreement, at least among corporate finance theorists that the objective when making decisions in a business is to maximize value. There is some disagreement on whether the objective is to maximize the value of the stockholder's stake in the business or the value of the entire business (firm), which includes besides stockholders, the other financial claim holders (debt holders, preferred stockholders etc.). Furthermore, even among those who argue for stockholder wealth maximization, there is a question about whether this translates into maximizing the stock price. As we will see in this chapter, these objectives vary in terms of the assumptions that are needed to justify them. The least restrictive of the three objectives, in terms of assumptions needed, is to maximize the firm value and the most restrictive is to maximize the stock price.

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