Final answer:
The goal of financial management is to maximize shareholder wealth, focusing on the long-term rather than merely short-term EPS maximization, to align with business growth and sustainability. Stock price maximization considers the present value of anticipated future cash flows and includes investors' expected returns from dividends or capital gains. Agency conflicts are mitigated through governance practices and incentive structures.
Step-by-step explanation:
The primary goal of a corporation is to maximize shareholder wealth, rather than merely focusing on short-term profit maximization. This approach is taken because short-term profits may not accurately reflect the long-term health and growth prospects of a company. Maximizing shareholder wealth, often through stock price maximization, aligns with the long-term growth and sustainability of a business.
Earnings per share (EPS) maximization differs from stock price maximization in that EPS is a short-term indicator of profitability and does not necessarily equate to a higher stock price, which factors in future growth prospects, risk, and other market sentiments. The stock price reflects the present value of anticipated future cash flows and incorporates the investor's expected rate of return, which can stem from dividends or capital gains.
To address agency conflicts between managers and shareholders, mechanisms such as incentive structures aligning managers' interests with those of shareholders, or governance practices like shareholder voting rights, can be effective. This helps ensure that managers act in the best interest of the owners of the company—the shareholders.