February 22, 2017

Homework Help: Finance

Posted by Greatdanelola on Wednesday, September 17, 2008 at 8:20pm.

I answered the following questions, butI just want to make sure Im on the right track. Please assist...

What are the differences between shareholder wealth maximization and profit maximization?

Shareholder wealth maximization strictly relates to the market value of a shareholders common stock. Since the market values fluctuate throughout everyday, shareholders tend to rely on a firm to seek to maximize their stock prices. Shareholder wealth also involves that companies equity, debts and other financial activities. The market really determines a persons shareholder wealth.

Profit maximization relates strictly to a companies profits only. Profit maximization is good for someone who knows of a particular business whose sales revenues are constant. For instance, let’s use Best Buy for example. Best Buy sells electronics every single day, so profits to a shareholder would stay at an ultimate high. Whereas, a local bike shop may not sell one bike for weeks. A shareholder gains its profits from a companies revenue only.

Is the shareholder wealth maximization goal a short or long-term goal?

I would tend to think that shareholder wealth maximization is a long-term goal as businesses want to give investors the opportunity to be invested for a very long time. Management of companies that people are invested in sit together and reach for long-term goals for that company whether it be expanding the stores they sell their products in or create more products to sell.

And the last question Im stuck on....can someone guide me in the right direction or offer suggestions?

Explain why management may tend to pursue goals other than shareholder wealth maximization.

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