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.
lotsa luck
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
Management may tend to pursue goals other than shareholder wealth maximization due to several reasons. It is important to note that shareholder wealth maximization is often considered the primary goal of a firm, as it aligns the interests of shareholders with the overall success of the company. However, there are various factors that can influence management's decision to prioritize other goals:
1. Stakeholder interests: In addition to shareholders, a company has multiple stakeholders, including employees, customers, suppliers, and the community. Management may pursue goals that prioritize the interests of these stakeholders, as maintaining positive relationships with them can be crucial for the long-term success and sustainability of the business. For example, management may invest in employee training and development programs or implement environmentally friendly practices to satisfy the demands of stakeholders concerned with social and environmental responsibility.
2. Competitive advantage: Management may decide to pursue goals that focus on gaining a competitive edge in the market. This could involve making strategic investments, expanding product lines, or improving operational efficiency. These actions may require short-term sacrifices in shareholder wealth but could lead to long-term profitability and growth.
3. Legal and ethical considerations: Management must adhere to legal and ethical standards while making business decisions. There may be situations where pursuing shareholder wealth maximization conflicts with these obligations. For instance, management may forego short-term profit opportunities to comply with environmental regulations or ensure fair treatment of employees.
4. Long-term sustainability: Management may prioritize long-term sustainability and stability over immediate profit maximization. This could involve reinvesting profits into research and development, innovation, or infrastructure improvements, even if it means sacrificing short-term gains. Such investments can foster long-term growth and ensure the company's survival in a rapidly evolving business landscape.
5. Corporate social responsibility: Many companies recognize the importance of corporate social responsibility (CSR) in today's society. Management may choose to pursue goals that align with CSR initiatives, such as reducing carbon emissions, promoting diversity and inclusion, or supporting charitable causes. These actions can enhance the company's reputation and brand value, attracting socially conscious investors and consumers.
Ultimately, management's decision to pursue goals other than shareholder wealth maximization can be influenced by a combination of these factors. It is important for management to carefully balance the interests of various stakeholders while considering the long-term sustainability and profitability of the business.