What are some of the problems involved in implementing the goal of maximization of shareholder wealth?
To discuss: The problems involved in implementing the goal of maximization of shareholder wealth.
Explanation of Solution
The problems involved in implementing the goal of maximization of shareholder wealth are as follows:
One such problem is maximization of the market value of the company's common stock. Numerous things influence the price of stock, so distinguishing which changes in the price of stock is because of the decisions made by the management and which changes are because of outside factors, for example, the state of the economy might be troublesome.
There may likewise be vulnerability about the inevitable financial pay-off of certain business investments. The investors and managers may have distinctive time horizons and diverse risk inclinations, which can influence their firm valuation. Moreover, managers may not generally act to the greatest advantage of investors, an exemplary instance of an agency issue.
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Chapter 1 Solutions
MyLab Finance with Pearson eText -- Access Card -- for Foundations of Finance
- Describe and explain the concept of market efficiency. In what sense is this concept an important part of the shareholder wealth maximization objective? Elaborate your answer. Please.arrow_forwarddiscuss financial theories surrounding the shareholder wealth maximization paradigm (e.g. agency theory).arrow_forwardWhy should shareholder wealth maximization be the overriding objective of the management?arrow_forward
- How to encourage the managers to act in a way which is consistent with the objective of maximization of shareholder wealth?arrow_forwardIs shareholder wealth maximization a concern in today's market?arrow_forwardIdentify the conflict between the goal of shareholder wealth maximization and other stakeholder concerns (sometimes referred to as environmental, social, and governance (ESG) concerns).arrow_forward
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