The Objective in Corporate Finance
Aswath Damodaran
2
THE OBJECTIVE IN CORPORATE FINANCE “If you don’t know where you are going, it does’nt maCer how you get there”
First Principles 3
Aswath Damodaran
3
The Classical Viewpoint 4
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Van Horne: "In this book, we assume that the objecKve of the firm is to maximize its value to its stockholders" Brealey & Myers: "Success is usually judged by value: Shareholders are made beCer off by any decision which increases the value of their stake in the firm... The secret of success in financial management is to increase value." Copeland & Weston: The most important theme is that the objecKve of the firm is to maximize the wealth of its stockholders." Brigham and Gapenski: Throughout this book we operate on the assumpKon that the management's primary goal is stockholder wealth maximizaKon which translates into maximizing the price of the common stock. 4
Aswath Damodaran
The ObjecKve in Decision Making 5
¨
In tradiKonal corporate finance, the objecKve in decision making is to maximize the value of the firm. A narrower objecKve is to maximize stockholder wealth. When the stock is traded and markets are viewed to be efficient, the
2
THE OBJECTIVE IN CORPORATE FINANCE “If you don’t know where you are going, it does’nt maCer how you get there”
First Principles 3
Aswath Damodaran
3
The Classical Viewpoint 4
¨
¨
¨
¨
Van Horne: "In this book, we assume that the objecKve of the firm is to maximize its value to its stockholders" Brealey & Myers: "Success is usually judged by value: Shareholders are made beCer off by any decision which increases the value of their stake in the firm... The secret of success in financial management is to increase value." Copeland & Weston: The most important theme is that the objecKve of the firm is to maximize the wealth of its stockholders." Brigham and Gapenski: Throughout this book we operate on the assumpKon that the management's primary goal is stockholder wealth maximizaKon which translates into maximizing the price of the common stock. 4
Aswath Damodaran
The ObjecKve in Decision Making 5
¨
In tradiKonal corporate finance, the objecKve in decision making is to maximize the value of the firm. A narrower objecKve is to maximize stockholder wealth. When the stock is traded and markets are viewed to be efficient, the