Ican 2025 Strategic Financial Management Question 7

You recently had a conversaiton with one Director of a client company. He shared: „Over the weekend I was reading an aritcle on ifnance in a Sunday newspaper. It said that as shareholder wealth maximisaiton is the generally accepted corporate objecitve, net present value is the most logical approach to investment appraisal‟. It then went on to say that “the „capital asset pricing model‟ is the best way to ifnd the appropriate discount rate to use. This is apparent because you can use the average rate of return from other businesses, also it ignores the speciifc risk of the investment concerned.” This all seems nonsense to me. These days corporate management needs to be concerned with more than just the shareholders. What about all of the other groups who contribute to the business? They cannot be ignored. Even if shareholders‟ wealth were the key issue, I do not see how NPV ifts in. Surely internal rate of return is more to the point because it favours investments that get the best returns and cover ifnancing costs. Those investments will make the shareholders richer. As for CAPM, it seems to defy all logic. It cannot be correct to ignore the returns that the invesitng business seeks and just concentrate on other businesses. Risk must be taken into account. In our business we compare weighted average cost of capital with the IRR and this seems more logical than using CAPM.‟ The Director went on to say: „The aritcle also said that, in theory, it does not make any difference to the shareholders whether new ifnance is raised from a share issue or a loan stock issue as they both cost the same. We raise all of our new ifnance from retained earnings, which does not cost anything, but loan ifnance has a cost.