FIN 3403 Chapter Notes - Chapter 1: Corporate Finance, Sole Proprietorship, Profit Maximization
Document Summary
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 use this 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 are included. 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 stock upward. In this way, all financial decisions are evaluated, and all financial decisions affect shareholder wealth. The goal of shareholder 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 these actions may not directly result in increased profits, they may affect consumers" and legislators" attitudes.
