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Theories of Term Structure of Interest Rates

1-1 What are some problems involved in the use of profit maximization as the goal of the firm? How does the goal of maximization of shareholder wealth deal with those problems?
1-7 Using the following criteria, specify the legal form of business that is favored:
A-organizational requirements and costs.
B-liability of the owners
C-continuity of business
D-transferability of ownership
E-management control and regulations
F-ability to raise capital
G-income taxes.
(Some of the key terms in this chapter were corporation, general partnership, limited partnership, partnership, sole proprietorship, s-type corporation.)

Which of the popular theories of the term structure of interest rates do you find most convincing? Why? What would be the advantages of your organization obtaining funding via private placement?

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1-1 What are some problems involved in the use of profit maximization as the goal of the firm? How does the goal of maximization of shareholder wealth deal with those problems?

Profit maximization should not be the decision criterion of the management. Instead it should be wealth maximization, which is based on the maximization of cash flows. Cash flows are more important to business as it leads to wealth maximization. The profit maximization has certain pitfalls as a criterion, which are as follows:
- It is Vague
- It Ignores the Timing of Returns
- It Ignores Risk

Moreover, in new business environment profit maximization is regarded as
- Unrealistic
- Difficult
- Inappropriate
- Immoral.

Benefits of cash flow as a criteria

- Maximizes the net present value of a course of action to shareholders.
- Accounts for the timing and risk of the expected benefits.
- Meets the fundamental objective-maximize the market value of the firm's shares.

Importance of Societal responsibility and other objectives:

Some of the variables considered to be considered by the management are:
1. Environment
2. Community relations
3. Employee relations
4. Share holders
5. Customer relations
6. Minorities and Women

Thus Besides wealth maximization it should also satisfy other stakeholders as the organization is taking the resources from them.

Using the following criteria, specify the legal form of business that is favored:
A- organizational requirements and ...

Solution Summary

This solution provides explains for the various theories of term structure of interest rates.

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