...Profit Maximization and Wealth Maximization are two objectives of Financial Management. Financial Management takes cares for proper utilization of funds, such that it will increase company earnings. Profit Maximization refers to the profit of the firm should be increased while in Wealth Maximization objective of a firm is to maximise its wealth and the value of its shares. There is always a debate regarding which more important. Profit Maximization The basic concept behind profit maximization is to earn a large amount of profit. It is a short term objective of the company (every fiscal cycle). There is no consideration for risks and uncertainty. It acts as measure for operational efficiency of the company. Profit maximization is necessary for growth and survival of the company. Wealth Maximization The goal of wealth maximization is to improve market value of shares. The main focus is on achieving long term objectives. There is consideration for risks and uncertainty. It tends to gain a large market share. It accelerates the growth rate of a company. I cannot say which one is better. Profit is basic requirement for any company. Profit feeds oxygen in the system to take breathe and survive. As we know profit is directly proportional to the risk. Higher the profit, the higher will be the risk. Risk factor can be neglected for a short run (profit maximization) but in long run (wealth maximization) risks or uncertainty cannot be ignored. Shareholders invest in company in hope...
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...What is Shareholders’ Wealth Maximization? Shareholders are individuals who own a share of a firm or an organization by buying stocks of that organization and as a result they are entitled of any financial profit made by any economic activity that generates those profits. Shareholders Wealth Maximization is a modern approach adopted by financial management that aims to increase the wealth of shareholders in a long term process rather than making short term profits. This objective can be achieved by maintaining a relatively high stock market price of the company which will reflect the wealth of its shareholders and affect the company’s behaviors in regards to decision making. As the stock price increases, the wealth of those who hold the stock increases as well and the net value of the company increases as a result. This decision making process takes into consideration any risk factors that might compromise the main objective and for this reason the financial manager must be aware and in full knowledge about the parameters that could affect the stock price. What is profit maximization? Profit maximization is basically the process of identifying the most efficient manners in which the highest net income, or profit, with the resources and market share in hands can be obtained. The major difference between profit maximization and shareholders’ wealth maximization is that the former focuses on relatively high gains in short periods of time that can be gained through, for example;...
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...concepts and tax code The appropriate goal for the firm is the maximization of shareholders' wealth (maximization of the market value of common stock) because it includes the effects of all financial decisions. Indeed, with poor investment or dividend decisions will cause a fall in the total value of the firm's stock and on the other hand, good decisions will push the price of the stock upward. In this way all financial decisions are evaluated, and all financial decisions affect shareholder wealth. Investors will not invest if they do not expect to receive a return on their investment. They will want a return that satisfies two requirements: - A return for delaying consumption (investors will want to receive at least the same return that is available for risk-free investments, such as the rate of return being earned on U.S. government securities). - An additional return for taking on risk (risky investments are less attractive, unless they offer the prospect of higher returns) (Principles 2 and 3: Money has a Time Value and Risk requires a reward) Returns are expected not promised. We focus on cash flows rather than accounting profits because these are the flows that the firm receives and can reinvest. The cash flow method considers the timing of cash inflows and outflows and discounts those flows according to the time of occurrence. Whereas, accounting profits ignore the time value of money. As per the accounting profit, profit is generated once you sell...
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...An Improved Pedagogy of Corporate Finance: a Constrained Shareholder Wealth Maximization Goal by Michael R. Santos , Gina Vega , John T. Barkoulas INTRODUCTION Bloom's taxonomy (1956) has guided pedagogical structure and innovation for half a century in the United States, and its focus on developmental learning remains relevant and instructive for us. The six developmental levels (knowledge, understanding, application, analysis, synthesis, and evaluation) separate basic knowledge acquisition from the critical thinking and analytical skills necessary for making ethical decisions or judgments. Answering questions about business ethics requires knowledge from multiple disciplines, including philosophy, psychology, political science, sociology, economics, finance, organizational management, and law. Analyzing such a vast body of data in ethical frameworks requires the highest levels (analysis, synthesis, and evaluation) of critical thinking as expressed in the taxonomy. Corporate governance, an interdisciplinary subject addressed in all these disciplines, explores the inter- workings of both for-profit firms and not-forprofit firms and is an area requiring business students to evaluate ethical issues when making decisions. Despite the broad responsibility of teaching corporate governance in the finance classroom, the pedagogy of finance has been restricted to ideas derived primarily from economics, statistics, and finance. Competing ideas from other disciplines are generally...
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...reputation effects often make it in the firm's own interest to act ethically toward its business partners and employees since the firm's ability to make deals and to hire skilled labor depends on its reputation for dealing fairly. In some circumstances, when firms have incentives to act in a manner inconsistent with the public interest, taxes or fees can align private and public interests. For example, taxes or fees charged on pollution make it more costly for firms to pollute, thereby affecting the firm's decisions regarding activities that cause pollution. Other "incentives" used by governments to align private interests with public interests include legislation to provide for worker safety and product or consumer safety, building code requirements enforced by local governments, and pollution and gasoline mileage requirements imposed on automobile manufacturers. AACSB: Ethics Blooms: Analysis Difficulty: 2 Medium Learning Objective: 01-06 Explain why value maximization is not inconsistent with ethical behavior. Topic: Understanding the Corporation Is value maximization always ethical? Modern finance does not condone attempts to pump up stock price by unethical means, but there need be no conflict between ethics and value maximization. The surest route to maximum value starts with products and services that satisfy customers. A good reputation with customers, employees, and other stakeholders is also important for the firms' long-run profitability and value. ...
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...though Dale feels he is carrying out his work with full efficiency as is his group of co workers in his department, the result is a downturn in the company stock price by almost $2 a share over the last nine months. What should the management of Sports Products, Inc. pursue as its overriding goal? Why? The overriding objective of the company management of Sports Products needs to focus on how to maximize the assets of the shareholders in the business. The corporate objective task of making the most of shareholder wealth presupposes that company management work in the best interests of stockholders and not just their own individual goals and not to try to seize wealth from lenders to benefit company stockholders. Stockholder wealth maximization also presumes that company managers do not take measures to mislead...
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...Chapter 1 An Overview of Financial Management LEARNING OBJECTIVES After reading this chapter, students should be able to: • Explain the career opportunities available within the three interrelated areas of finance. • Identify some of the forces that will affect financial management in the new millennium. • Briefly explain the responsibilities of the financial staff within an organization. • Describe the advantages and disadvantages of alternative forms of business organization. • State the primary goal in a publicly traded firm, and explain how social responsibility and business ethics fit in. • Define an agency relationship, give some examples of potential agency problems, and identify possible solutions. • Identify major factors that determine the price of a company’s stock, including those that managers have control over and those that they do not. • Discuss whether financial managers should concentrate strictly on cash flow and ignore the impact of their decisions on EPS. LECTURE SUGGESTIONS Chapter 1 covers some important concepts, and discussing them in class can be interesting. However, students can read the chapter on their own, so it can be assigned but not covered in class. We generally spend much of the first day going over the syllabus and discussing grading and other mechanics relating to the course. To the extent that time permits, we talk about the topics that will be covered in the course and the structure...
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...opportunities in both financial services and managerial finance. The three basic legal forms of business organization (sole proprietorship, partnership, and corporation) and their strengths and weaknesses are described, as well as the relationship between major parties in a corporation. The managerial finance function is defined and differentiated from economics and accounting. The chapter then summarizes the three key activities of the financial manager: financial analysis and planning, investment decisions, and financing decisions. A discussion of the financial manager’s goals—maximizing shareholder wealth and preserving stakeholder wealth—and the role of ethics in meeting these goals is presented. The chapter includes discussion of the agency problem—the conflict that exists between managers and owners in a large corporation. This chapter, and all that follow, emphasize how the chapter content plays a vital role in the student’s professional and personal life. Each chapter includes an early discussion of the relevance of the topic to majors in accounting, information systems, management, marketing, and operations. Throughout each chapter are detailed examples of how the chapter’s topic relates to the student's financial life. These pedagogic tools should motivate students to quickly grasp an understanding of the chapter content and employ it in both their professional and personal lives. Suggested Answer to Opener in Review Question If Zuckerberg is expected to remain the CEO...
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...stockholders interests? The board of directors What are the disadvantages of a corporation Double taxation of dividends Subchapter S corporation can circumvent this (only up to 35 stockholders) Complex management requirements Costly reporting and structural requirements What is the issue for agency theory? Why is it important for public corporations but not private corporations? Agency theory looks at relationship owners and managers. Competing goals In private corporations managers and owners are usually the same people. Why are institutional investors so important now? They own a large percentage of stock They exercise voting rights and demand board seats Why is profit maximization by itself an inappropriate goal? The time value of money must be considered. The timing of profits can have a big effect on the benefit to the business. Profit is subject to many different measurements which can be manipulated. Changes in profit may represent changes in risk which may cause future problems for the business. Problems of inflation and currency movement also complicate things. What is meant by “Maximization of investor wealth”? Achieving the highest value for the business Stock prices Options for management....
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...Question-1: What is finance? Ans: Finance is the life blood of every corporation. In the era of modern trade and commerce, business firm have to decide from where they will raise fund, where they will invest and how much of the profit will be distributed among the shareholders. “Finance” Came from Latin word “finis” means “dealing with the money”.finace is called the art and science of managing money. At the micro level, finance is the study of financial planning, asset management and fund raising for business and financial institutions. At the macro level, finance is the study of financial institution and financial markets and how they operate within the financial systems in both the domestic and global economics. Scholar’s view: “Finance consists of providing and utilizing the money, capital rights, credit and funds of any kind which are employed in the operation of an enterprise.” _George R Terry “Finance is concerned with the process, institutionsmarkets and instruments involved in the transfer of money among and between individuals, business and governments”. _Lawrence J Gitman From the above discussion, it can be said that finance is the process of financial planning, identification of sources of fund raising, investment of fund, protection of fund, distribution...
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...assets in at least one country beside its home country is considered as Multinational Corporation. Such companies have offices and/or factories in different countries and usually have a centralized head office where they co-ordinate global management. Very large multinationals have budgets that exceed those of many small countries. A Multinational Company is referred to as a Multinational Business Enterprise (MBE) or a Transnational Company (TNC) or International Business (INB). Multinational Companies (MNCs) are defined as firms that engage in some form of international business. Their managers conduct international financial management, which involves international investing & financing decisions that are intended to maximize the value of MNC.” An enterprise operating in several countries but managed from one (home) country is called a multinational corporation. Generally, any company or group that derives a quarter of its revenue from operations outside of its home country is considered a multinational corporation. The International Labor Organization (ILO) has defined an MNC as a company that has its management headquarters in one country, known as the home country, and it operates in several other countries, known as host countries. Oxford Dictionary of Business has defined as “A corporation that has production operations in more than one country for...
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...These costs have taken the form of increased cost of material, labor, and equipment on one hand and lost productivity and market competition on the other. These adverse effects on business have been in direct conflict with the cardinal management objective of maximization of shareholder wealth realistically measured in terms of market value of shareholder equity. Proponent for government regulations to business have argued that shareholder wealth maximization is not realistic and that there should be a balanced attention to all what they call stakeholders interest in which also the providers of risk capital are part. Nevertheless it is true that one cannot maximize interests of all stakeholders simultaneously. There is a need of prioritizing, and it would be in the best interest of all stakeholders to start with maximization of shareholder wealth since it is all-inclusive with positive spread effects to the society as a whole. References: American Law Institute (1994). Principles of corporate governance: Analysis and recommendations. St. Paul, MN: ALI Publishers.V.1, Pt...
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...conduct a business. I contrast, a corporation is a legal entity n created by a state. The corporation is separate and distinct from its owners and managers. b. In a limited partnership, limited partners’ liabilities, investment returns and control are limited, while general partners have unlimited liability and control. A limited liability partnership (LLP), sometimes called a limited liability company (LLC), combines the limited liability advantage of a corporation with the tax advantages of a partnership. A professional corporation (PC), known in some states as a professional association (PA), has most of the benefits of incorporation but the participants are not relieved of professional (malpractice) liability. c. Stockholder wealth maximization is the appropriate goal for management decisions. The risk and timing associated with expected earnings per share and cash flows are considered in order to maximize the price of the firm’s common stock. d. Social responsibility is the concept that businesses should be partly responsible for, and thus bear the costs of, the welfare of society at large. Business ethics can be thought of as a company’s attitude and conduct toward its employees, customers, community, and stockholders. A firm’s commitment to business ethics can be measured by the tendency of the firm and its employees to adhere to laws and regulations relating to such factors as product safety and quality, fair employment practices, and the like. e. Normal profits are those...
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...Economics is the study of the production and consumption of goods and the transfer of wealth to produce and obtain those goods. Economics explains how people interact within markets to get what they want or accomplish certain goals. There are mainly two key ideas in economics; that goods are scares and society must use its resources efficiently. Managerial economics is the study of how to direct scares resources in the way that most efficiently achieves a managerial goal. Managerial economics is the application of microeconomic theory and methodology to decisionmaking problems faced by private, public and non-profit institutions. It assists decision-makers i.e. managers in efficiently allocating scarce resources, planning corporate strategy, and executing effective tactics. Managerial economics to a certain degree is prescriptive in nature as it suggests course of action to a managerial problem. Problems can be related to various departments in a firm like production, accounts, sales, etc. Managerial economics or economics is categorized in two types; microeconomics and macroeconomics. Microeconomics is a branch of economics that studies the behavior of individuals and firms in making decisions regarding the allocation of limited resources. Macroeconomics is a branch of economics dealing with the performance, structure, behavior, and decision-making of an economy as a whole rather than individual markets. B. The Three Issues of Economic / Business Organization 1...
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...international investing and financing decisions that are intended to maximize the value of the MNC. Management is motivated to achieve a number of goals and objectives, some of which conflict with each other. However, the commonly accepted objective of an MNC is to maximize stockholder wealth on a global basis, as reflected by stock price. Managers of an MNC may make decisions that conflict with the firm’s goal to maximize shareholder wealth. This conflict of goals between firm’s managers and shareholders’ is often referred to as the agency problem. For the firm to achieve its goals, it needs to put in place mechanism for control of agency problem. MNCs are recognized as the main actors of e international business, international business financing and global economies. According to Goshen and Bartlett, MNC is a firm that has substantial direct investment in foreign countries that it actively manages.2 the value of their sales in host countries overpasses the value of trade (imports and exports) in today’s World economy. Multinational companies attracted scientific and public attention from the moment of their appearance, and especially from the beginning of their intensive growth (during the 1960s). There are many interesting and important issues concerning MNC that have been elaborated in the literature such as motives of internationalization, forms and strategies of internationalization, effects on host and home countries, political aspects of MNC activities, Emerging forms...
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