ADMS 3530 Lecture Notes - Capital Budgeting, Double Taxation, Preferred Stock
8 May 2012
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Solutions: a firm might cut its labour force dramatically, which could reduce immediate expenses and increase profits in the short term. Similarly, a firm can boost profits over the short term by using less costly materials even if this reduces the quality of the product. Once customers catch on, sales will decrease and profits will fall in the future. The moral of these examples is that, because stock prices reflect present and future profitability, the firm should not necessarily sacrifice future prospects for short-term gains. The key advantage of separating ownership and management in a large corporation is that it gives the corporation permanence. The corporation continues to exist if managers are replaced or if stockholders sell their ownership interests to other investors. The corporation"s permanence is an essential characteristic in allowing corporations to obtain the large amounts of financing required by many business entities.
