You have heard the saying CASH "not profit" is KING". However in this course, you will read that the goal of the firm is to "MAXIMIZE WEALTH". Does having excess amounts of cash means that the firm has maximized wealthy? Discuss the above statements in light of your understanding of wealth maximization.
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You have heard the saying CASH "not profit" is KING". However in this course, you will read that the goal of the firm is to "MAXIMIZE WEALTH". Does having excess amounts of cash means that the firm has maximized wealthy? Discuss the above statements in light of your understanding of wealth maximization.
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- Does having excess amounts of cash means that the firm has maximized wealthy?It is said that one of the goals of a company is wealth maximization. Whose wealth does a firm wants to enhance in wealth maximization? (answer: the firm's stockholders) Why is the answer stockholders?When a firm is deciding how much cash to distribute to stockholders, it should consider two things: (1) The overriding objective is to maximize shareholder value and (2) the firm's cash flows belong to shareholders, so income shouldn't be retained unless management can reinvest those earnings at higher rates of return than shareholders can earn themselves. The (capital budegeting, capital structure, and residual dividend)? model sets the dividend paid equal to net income minus the amount of retained earnings necessary to finance the firm's optimal capital budget. It can be expressed in equation format as: Dividends = Net income - [(Target equity ratio)(Total capital budget)] Because investment opportunities and earnings will vary from year to year, strict adherence to this model would result in fluctuating, unstable dividends. However, investors prefer stable, dependable dividends. Consequently, firms should use this model to help set their long-run target payout ratios, but not as a…
- Which of the following is true. The firm’s ultimate financial goal is to maximize its revenues because this means more income for the shareholders. The firm’s ultimate financial goal is to maximize its net income because this increases the earnings per share of the shareholder. The firm’s ultimate financial goal is to increase its customer base to increase its market share. The firm’s ultimate financial goal is to maximize its free cash flows because this drives the value of the firm.A firm with positive cash flow from financing Is using their excess cash to pay down their debt, buy back stock and pay dividends Is using debt and/or equity financing to grow their asset base and/or cover negative cash flow from operationsWould it ever be rational for a firm to borrow money in order to pay cash dividends? Explain.
- a)- Do manager of a firm care more about their EPS than retained earnings? Explain why, just start your explanation with because.... b) Do vendors of a firm care more about cash flow than EPS? Explain why, just start your explanation with because.... c) Do investors care more about EPS than stock price? Explain why d) Do banks (or creditors who loaned money to a firm) care more about the firm's working capital or the firm's dividends? Which one and why? e. Which of the following will raise a firm's stock price: stock repurchases or a new stock issue? Briefly explain why? Start your explanation with because...d) Did the cash flow from operations cover the dividend payment made by the firm (if any)?e) If the firm has generated excess cash from operations, how did the firm invest the excess cash? If not, what were the sources of cash the firm used to pay for the capital expenditures and/or dividends? h) What other major items affected cash flows for the firm?f) What was the trend in capital expenditures for the firm?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.
- What does a positive operating cash flow mean for a company? What do a positive cash flow from assets, a positive cash flow to creditors and a positive cash flow to stockholders mean? What do these positive cash flows mean for an expansion plan financed by debt and equity?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?Remember that the primary goal of a firm is to maximize shareholder wealth by increasing the firm’s intrinsic value. It is thus important to understand the impact of distributions—both in the form of dividends or stock repurchases—on the firm’s value. Consider the following situation: Elle is a financial analyst in Demo You Inc’s. As part of her analysis of the annual distribution policy and its impact on the firm’s value, she makes the following calculations and observations: • The company generated a free cash flow (FCF) of $45.00 million in its most recent fiscal year. • The firm’s cost of capital (WACC) is 14%. The firm has been growing at 10% for the past six years but is expected to grow at a constant rate of 8% in the future. • The firm has 11.25 million shares outstanding. • The company has $120.00 million in debt and $75.00 million in preferred stock. Along with the rest of the finance team, Elle has been part of board meetings and knows that the company is…