Profit maximization, maximization of shareholder wealth?
Why is profit maximization, by itself, an inappropriate goal? What is meant by the goal of maximization of shareholder wealth?
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Profit maximization by itself is not appropriate because the goal could overtake other aspects of the company which are important. also other elements of the company could be sacrificed if the company only cares about profit.
For example the company could try to reduce costs by buying cheaper goods. The value and quality of the goods produced would be then reduced, rendering customers unsatisfied. ...
Solution Summary
Why is profit maximization, by itself, an inappropriate goal? What is meant by the goal of maximization of shareholder wealth?
Caledonia Products Case: Differences between goals of profit maximization and maximization of shareholder wealth; risk-return trade-off
Please see attached file.
The final stage in the interview process for an assistant financial analyst at Caledonia Products involves a test of your understanding of basic financial concepts and of the corporate tax code. You are given the following memorandum and asked to respond to the questions. Whether you are offered a position at Caledonia will depend on the accuracy of your response.
To: Applicants for the position of Financial Analyst
From: Mr. V. Morrison, CEO, Caledonia Products
Re: A test of your understanding f basic financial concepts and of the corporate tax code
Please respond to the following questions:
1. What are the differences between the goals of profit maximization and the maximization of shareholder wealth? Which goal do you think is more appropriate?
2. What does the risk-return trade-off mean?
3. Why are we interested in the cash flows rather than accounting profits in determining the value of an asset?
4. What is an efficient market and what are the implications of efficient markets for us?
5. What is the cause of the agency problem and how do we try to solve it?
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Book title: Foundations of Finance: Logic and Practice of Financial Management (6th Edition)
Author: Keown, Martin, Petty, and Scott