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Focusing solely on profits can be dangerous. Explain why shareholder wealth maximization, rather than profit maximization, is a firm’s goal?
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- Why is it that the goal of financial management is maximization of shareholders’ wealth rather than maximization of profit?It has been argued that shareholder wealth maximization is not a realistic normative goal for the firm, given the social responsibility activities that the firm is “expected” to engage in (such as contributing to the arts, education, etc.). Explain why these social responsibility activities are not necessarily inconsistent with shareholder wealth maximization.Finance experts contend that the ultimate goal of a firm should be maximization of shareholder wealth. On the other hand, managers tend to pursue different goals. Discuss the concept of shareholder wealth maximization, the goals of management and the reasons for the goal differences.
- How might capital rationing conflict with the goal of maximizing shareholders' wealth?What does it mean to say that managers should maximize shareholders' wealth "subject to ethical constraints"? What ethical considerations might factor into decisions that result in lower cash flow and stock price effects than they might have otherwise been valued?Why do you think that wealth maximization is an appropriate goal of the firm? Does it lead to maximization of the wealth of shareholders? Does an attempt by the management to maximize value ofthe firm benefit the society? Explain.