We can imagine the financial manager doing several things on behalf of the firm's stockholders. For example, the manager might: Make shareholders as wealthy as possible by investing in real assets. Modify the firm's investment plan to help shareholders achieve a particular time pattern of consumption. Choose high- or low-risk assets to match shareholders' risk preferences. Help balance shareholders' checkbooks. But in well-functioning capital markets, shareholders will vote for only one of these goals. Which one? Why?

We can imagine the financial manager doing several things on behalf of the firm's stockholders. For example, the manager might: Make shareholders as wealthy as possible by investing in real assets. Modify the firm's investment plan to help shareholders achieve a particular time pattern of consumption. Choose high- or low-risk assets to match shareholders' risk preferences. Help balance shareholders' checkbooks. But in well-functioning capital markets, shareholders will vote for only one of these goals. Which one? Why?

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter1: The Role And Objective Of Financial Management

Section: Chapter Questions

Problem 5QTD

See similar textbooks

Similar questions

Consider the dilemma you might someday face if you are the CFO of a company that is struggling to satisfy investors, creditors, stockholders, and internal company managers. All of these financial statement users are clamoring for higher profits and more net assets (also known as equity). If at some point, you suddenly found yourself not meeting the internal and external earnings and equity targets that these parties expect, you would probably search for some way to make the financial statements look better. What if your boss, the CEO, suggested that maybe you should make just one simple journal entry to record all the goods that your company is holding on consignment, as if that significant amount of goods were owned by your company? She might say that this action on your part would fix a lot of problems at once, since adding the consigned goods to merchandise inventory would simultaneously increase net assets on the balance sheet and increase net income on the income statement (since it would decrease cost of goods sold). How would you respond to this request? Write a memo, detailing your willingness or not to embrace this suggestion, giving reasons behind your decision. Remember to exercise diplomacy, even if you must dissent from the opinion of a supervisor. Note that the challenge of the assignment is to keep your integrity intact while also keeping your job, if possible.
Which is the best explanation of how dividends could convey information to investors that could affect the value of a firm? A. Promises to pay dividends limit the ability of managers to accumulate too much cash and to make unwise investments with that cash. B. Investors are skeptical when managers claim that prospects for the firm are bright, but by committing to paying a dividend, managers are adding credibility to their statements about the firm's future. C. Dividends are a more tax efficient way to generate returns for shareholders. D. By paying dividends consistently, investors will come to see dividend payments as less risky than capital gains. Give typing answer with explanation and conclusion
It is often stated that the ultimate goal of the Finance Manager is tomaximize the current value of the stock of shareholders and not simplymaximizing the profit of the firm. Discuss
Which one of the following actions by a financial manager creates an agency problem? Lowering selling prices that will result in increased firm value Agreeing to expand the company at the expense of stockholders' value Borrowing money when doing so creates value for the firm Agreeing to pay management bonuses based on the market value of the firm's stock
Firms must provide the right incentives if they are to get -Select-shareholderscreditorsmanagersItem 1 to focus on long-run value maximization. Conflicts exist between managers and stockholders and between stockholders (represented by managers) and -Select-employeesdebtholderscustomersItem 2 . Managers' personal goals may compete with shareholder wealth maximization. However, managers can be motivated to act in their stockholders' best interests through (1) reasonable -Select-vacationcompensationperquisiteItem 3 packages, (2) firing of underperforming managers, and (3) the threat of hostile takeovers. If a firm's stock is undervalued, corporate raiders will see it as a bargain and will attempt to capture the firm in a hostile takeover.-Select-StockholdersBondholdersItem 4 generally receive fixed payments regardless of how well the firm does, while -Select-stockholdersbondholdersItem 5 earn higher returns when the firm's earnings are higher. Investments in -Select-riskysafeItem…
Tutorial Questions Explain to John, your mentor, the primary goal of the organization? Your manager is requesting you to provide an explanation to the question. Would the role of a financial manager be likely to increase or decrease in importance if the rate of inflation increased? What is the difference between stock price maximization and profit maximization? What are the three principal forms of business organization? What are the advantages and disadvantages of each? What mechanisms exist to influence managers to act in shareholders’ best interests? What is an agency relationship? What agency relationships exist within a corporation? What are financial intermediaries, and what economic functions do they perform? How does an efficient capital market help to reduce the prices of goods and services? What is the term structure of interest rates? What is a yield curve? How should users and savers of…
Shareholders want managers to maximize the (Click to select) dividend expected return financial assets higher lower market value opportunity cost of capital real assets shareholders of their investments. The firm faces a trade-off. Either it can invest its cash in (Click to select) dividend expected return financial assets higher lower market value opportunity cost of capital real assets shareholders or it can give the cash back to (Click to select) dividend expected return financial assets higher lower market value opportunity cost of capital real assets shareholders in the form of a(n) (Click to select) dividend expected return financial assets higher lower market value opportunity cost of capital real assets shareholders and they can invest it in (Click to select) dividend expected return financial assets higher lower market value opportunity cost of capital real assets…
What is the important question of corporate finance when a finance manager advises the company’s management to accept or reject a long-term investment project? What the finance manager needs to analyse to justify her/his adviceHow a corporation is different from a partnership in terms of owner, legal status, liabilities, life, regulation, access to capital, taxation and transfer?
Financial managers shouldconsider this when.improving thefinancials of the firm A. that the overall goal is the maximization of the market value of the equity through improved income and cashflows.B. that cost minimization is the primary concern of the firm.C. that exposing the firm to the most risk for the most return should be priority.D. that the personal goals of customer and employees are above the goals of the shareholders.
A crucial role of financial managers is in making financial decisions and exercising control over finances in the organization. They make use of techniques like ratio analysis, financial forecasting, profit, and loss analysis, among others. Imaging you are the CFO of a multinational corporation and part of your daily tasks are the making of financial decisions, and one specific of those decisions will boost this quarter earnings but will impact stock market value. What should you do? Implement your decision or modify it to halter the potential impact of stock value?
If a company’s board of directors wants management to maximize shareholder wealth, should the CEO’s compensation be set as a fixed dollar amount, or should the compensation depend on how well the firm performs? If it is to be based on performance, how should performance is measured? Would it be easier to measure performance by the growth rate in reported profits or the growth rate in the stock’s intrinsic value? Which would be the better performance measure? Why?
Explain how a financial manager can, in practice, maximize the wealth of shareholders.