Intro to Corporate Finance Chap. 1

Why is stock value maximization superior to profit maximization as a goal for management?

Stock value maximization is pretty significant to a company since it can be told about the company such as an reputation. Companies cannot exist by themselves. They do need a lot of money or

The financial mangers goal is acquisition, financing, and management of assets. The challenges are investment, financing, and asset management decisions.

Profit maximisation is when firms maximise their profits through sales and increasing the price of products. Profit maximisation occurs when total sale revenue is furthest above total cost which is when MR= MC. Firms are usually controlled by the managers, in order for managers to keep its position its must gain enough or maximise the firms’ profits, so it can satisfy the shareholders. However managers may want to take a different approach rather than maximising the firms’ profits. Managers may want to maximise managerial objectives such as maximising its sales rather than profits. However although they are taking a different approach, they still must gain enough profits to satisfy the firms’ shareholders in order to avoid losing their

b. As a financial manager, my focus would be on improving the firm’s cash flow and cash return on investments by determining which units in the business are generating or depleting the firm’s cash.

In order for any business to be successful they would need to know how to make the most profit for the goods they are producing and selling.

company should be, which the answer is to make money. The book is about transforming

To put it simply, in financial terms, to maximize shareholders wealth means to maximize purchasing power. Throughout the years, we have learned that markets are most efficient when the company is able to maximize at the current share price. Every company’s main goal should be to strive to maximize its value to every single one of their shareholders. Common stock represents the value of the market price, and it also gives the shareholder an idea of the different investment, financing, and dividend decisions made by that particular firm.

Management and investors are often more interested in the return earned on the funds invested than in the level of profits

To calculate profit maximization one may first calculate profit, which is Profit = Total Revenue – Total Costs. The following graph illustrates the organization’s steady growth in profitable business, but declining profit maximization:

Profitability plays a vital role in the survival of the company in the competitive market. High profitability helps the company not only in its growth but will also reward the investors with greater return. Performance and profitability is one among the major areas of concern for the management.

Profitability is the ability to make profit from all the business activities of an organization, company, firm, or an enterprise. It shows how efficiently the management can make profit by using all the resources available in the market. One of the most frequently used tools of financial ratio analysis is profitability ratios, which are used to determine the company's bottom line. Profitability ratios show a company's overall efficiency and performance. Profitability and management efficiency are usually taken to be positively associated: poor current profitability may threaten current management efficiency and vice versa; poor management efficiency may threaten profitability. It is related to the goal of shareholders‟ wealth maximization, and investment in current assets is made only if an acceptable return is obtained. While liquidity is needed for a company to continue business, a company may choose to hold more cash than needed for operational or transactional needs i.e. for precautionary or speculative

Moreover it is also important that the corporate objective of Excelsior reflect a long term perspective for the company. Therefore this bring us to the objective proposed by the Finance Director, which is to maximise shareholder wealth.

Time is limited to the gambling game, when the game is over you either win or lose while some investments in companies last for years. Investing can be time rewarding, some stockholders benefit from dividends payment and others benefit from the capital appreciation. Investors see the longer the period of the investment the higher the probability they could gain higher return.

In the competitive environment, there is a strong prediction in economic theory that profitability is mean reversion both within and across industries. For instance, under competition, firms will leave relatively profitless industries and turn into relatively high profitable industries. Some companies introduce new products and technologies that bring more profitability for an entrepreneur. Otherwise, the expectation of failure which makes companies with low profitability motivations to distribute capital to more productive uses.

2. Maximization of Shareholder wealth: Investment decision is linked with strategic and tactical business decisions and therefore need to achieve desired long-term objectives. The most usual objective being the maximization of shareholder wealth.