Claro Que Si

Study Questions
1-1. The goal of profit maximization is too simplistic in that it assumes away the problems of uncertainty of returns and the timing of returns. Rather than usethis goal, we have chosen maximization of shareholders' wealth—that is, maximization of the market value of the firm's common stock—because the effects of all financial decisions areincluded. The shareholders react to poor investment or dividend decisions by causing the total value of the firm's stock to fall and react to good decisions by pushing the price of the stockupward. In this way all financial decisions are evaluated, and all financial decisions affect shareholder wealth.
1-2. Shareholder wealth maximization is the more comprehensive of thetwo. Profit maximization is a period of value that may be obtained by short-term management action which could be detrimental to profits in future periods.
1-3. The goal ofshareholder wealth maximization must be looked at as a long-run goal. As such, the public image of the firm may be of concern inasmuch as it may affect sales and legislation. Thus, while theseactions may not directly result in increased profits, they may affect consumers' and legislators' attitudes.
1-4. Almost all financial decisions involve some sort of risk-returntradeoff. The more risk the firm is willing to accept, the higher the expected return for the given course of action. For example, in the area of working capital management, the lessinventory held, the higher the expected return, but also the greater the risk of running out of inventory. While one manager might accept a given level of risk, another more risk-averse managermay not accept that level of risk. This does not mean that one manager is correct and one is not, only that not all managers will view the risk-return trade off in the same manner.