Posted by Greatdanelola on .
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.
The return on a share of stock comes from increasing the price on that share or by paying dividends. Shareholder wealth maximization is maximizing this return per share. For most investors, such maximization is a long-term goal. (Day traders are a notible exception). Share price is largely determined by profits. However, other factors do influence share price. In particular, future expectations can strongly affect share price. Rumors of a buy-out can send a stock sky high. Also, many companies with net losses have positive share prices, with expectation that such losses are short-term.
Profit maximization comes from maximizing the accounting amounts of total revenue less total costs. We usually think of profits as pre-tax profits. Profits are usually thought of as an annual measure. However, profits could be long-term.
Management awarding themselves huge bonuses is a simple example of management pursuing a goal other than shareholder wealth. Management donating company money to charities may be another example.
10. Assume it is early 2003 and the following bond quotations appeared in the wall street journal
Conoco Phillips COP 5.900 Oct 15, 2032 95.975 6.200 90 30 88,510
Amerada Hess AHC 7.125 Mar 15, 2033 100.145 7.113 179 30 55,000
a. How much in annual interest payment would an investor in each of these bonds receive?
b. How much would you have to pay to buy one COP bond at the price shown.
c. Why do you think the yield to maturity on the AHC bond is higher than the yield to maturity on the COP bond