Purchase Solution

Maximize earnings vs firm value

Not what you're looking for?

Ask Custom Question

Explain why managers who attempt to maximize earnings might not maximize firm value.

Purchase this Solution

Solution Summary

This solution of 500+ words explains the counter-intuitive fact that maximizing earnings does not always lead to maximizing firm value. It also lists three main factors that need to be taken under consideration when maximizing firm value.

Solution Preview

The Value of a Firm is based on a multitude of factors including Market related factors, Firm specific factors as well as Investment factors. Also, Value Based Management practices indicate that the Value of a Firm is dependent on the Future Cash Flows of a company which is a culmination of all the three key factors mentioned above. However, since Earnings are one of the key factors in the cash flows, managers tend to equate a higher earnings to the share price. Though current earnings are strongly correlated to the cash flows, the value of an organization is dependent on the Future Cash Flows it is expected to generate and hence Managers who attempt to maximize earnings might not maximize firm value.

Finance theories postulate that the Cash Flows of a ...

Purchase this Solution


Free BrainMass Quizzes
MS Word 2010-Tricky Features

These questions are based on features of the previous word versions that were easy to figure out, but now seem more hidden to me.

Cost Concepts: Analyzing Costs in Managerial Accounting

This quiz gives students the opportunity to assess their knowledge of cost concepts used in managerial accounting such as opportunity costs, marginal costs, relevant costs and the benefits and relationships that derive from them.

Change and Resistance within Organizations

This quiz intended to help students understand change and resistance in organizations

Accounting: Statement of Cash flows

This quiz tests your knowledge of the components of the statements of cash flows and the methods used to determine cash flows.

Marketing Research and Forecasting

The following quiz will assess your ability to identify steps in the marketing research process. Understanding this information will provide fundamental knowledge related to marketing research.