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Traditionally, the main objective of management is to maximize a firm's net income, or maximize earnings per share. Earnings per share (EPS) represent the net income earned for each share of outstanding common stock. Arriving at EPS, at first glance, appears to be a simple calculation of the basic formula: net income divided by the number of shares of common stock outstanding. However, as you will see, calculations of EPS involve many factors to come up with the numbers to be used in the numerator and denominator of the formula.

Generally there is a high relationship between EPS, cash flow and stock price; and they normally rise if firm sales also rise. But stock prices depend not just on today's earnings and cash flow, but also on future cash flow and riskiness of the future earnings which also have an effect on stock prices. There are several financial formulas used in conjunction with the EPS calculation to help determine the soundness of a firm. Maximizing EPS is no easy task; some company actions may well increase earnings but may inadvertently reduce stock price, while other actions may boost stock prices but reduce earnings. For example:

A company undertakes large expenses today that are designed to improve future performance. These expenditures will likely reduce EPS yet the stock market may respond positively if it foresees that these expenditures will significantly add to future earnings.

By contrast, a company that may undertake actions today to increase its earnings may see a drop in its stock price if market believes that these actions negatively impact future earnings and/or dramatically increase the firm's risk.

As mentioned, management's primary goal should be to maximize stockholders wealth - this is maximizing stock price. They take actions with intend to raise funds to maximize the value of the firm. Therefore management must effectively communicate the reason for any decline in earnings; if not, the company stock price will probably decline after the lower EPS are reported.

Understand that the price of the firm's stock also depends on the cash flow paid to shareholders, the timing of cash flows and their riskiness. The risk level of cash flow is affected by the financial environment as well as by investment, financing and dividend policy decisions made by financial managers.

The following actions exist or are implanted to motivate managers to act in the best interests of stockholders:

1. Managerial compensation

2. Direct intervention by stockholders

3.

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