The objectives of management may differ from those of the firm’s shareholders (owners). In a large corporation the stock may be so widely held that stockholders cannot even make known their objectives, have less control or influence on management. Often ownership and control are separate, a situation that allows management to act in its own best interest rather than those of the stockholders. We may think management as the agents of the owners. As their objectives differ so conflict between parties arise which creates agency cost of a firm. Ultimately, it causes agency problem in a firm.
Shareholder wealth maximization means maximizing the net present value (or wealth) of shareholders. Actually owner’s wealth maximization is reflected through the maximization of market price per share. The market price per share represents the value that market participants place on the market. The principle of shareholder wealth provides a rational guide for running a business and for the efficient allocation of resources in society.
The proportionate relationship between a company’s debt and equity is referred to as capital structure. Decision that is taken regarding the combination of debt and equity in a firm’s capital structure is called capital structure decision.
Investment decision or capital budgeting involves the decision of allocation of capital or commitment of funds to long-term assets that would yield benefit in the future. Two important aspects of the investment decision are: (i) the evaluation of the prospective profitability of new investments and (ii) the measurement of the cut-off rate against the prospective return of the new investment
