Financial Principals and Policies

864 Words Aug 27th, 2015 4 Pages
Xin Zheng xinzheng@callutheran.edu Chapter 1
2. What are the differences between shareholder wealth maximization and profit maximization? If a firm chooses to pursue the objective of shareholder wealth maximization, does this preclude the use of profit maximization decision-making rules? Explain.
Profit maximization means the company makes profit maximize. Maximize shareholder wealth states that management needs to bring maximize the value for its owners by make the most efficient resources and reasonable financial management. Therefore, shareholder wealth maximization include the profit-maximization model, it considers not only profit maximization model, but also the timing of return and the risk of the company. The most important the
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As we know, the returns offered to creditors are fixed but the returns to stockholders are variable. In this case, RJR was acquired by KKR, the debt of RJR increased from 38% of total capital to nearly 90% of total capital. This will decrease nearly 20% of the value of RJR’s bonds. The owner try to get the hope of receiving better returns through increase the risk of the company’s investments. So that, stockholders be influenced when this happen. The reason is that they don’t have chance to share in these higher returns. Because of this loss of value, Metropolitan Life Insurance Company and other large stockholders sued RJR for violating the rights of stockholder and protections under the bond covenants. Ultimately, they settled the suit due to the benefit of Metropolitan. Stockholders cannot resist this transaction even through this decision may have high risk.
Chapter 2
2. An investor bought 100 shares of Venus Corporation common stock 1 year ago for $40 per share. She just sold the shares for $44 each, and during the year, she received four quarterly dividend checks for $40 each. She expects the price of the
Venus shares to fall to about $38 over the next year. Calculate the investor’s realized percentage holding period return.
The investor’s realized percentage holding period return= ( Income+ Ending Value- Beginning value)/ Beginning Value
[(4400-400+4*(40))/4000]*100%=14%