CHAPTER 5

Free Cash Flow to Equity

Corporate Financial Management and Stock Valuation

Corporate financial management encompasses the efficient acquisition and allocation of funds. The objective of corporate financial management is to maximize the value of the firm. Solomon (1963, p. 22, Chapter II) argues that wealth maximization should be the goal of corporate financial management because this criterion maximizes the wealth of the owners of corporations and maximizes the wealth of a society by maximizing economic output. The value of the firm is measured by the market capitalization of the firm. The market capitalization of the firm is calculated by multiplying the total number of shares outstanding times the market price per share. The value ...

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