AFM373 Lecture Notes - Lecture 2: Preferred Stock, Profit Maximization
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12 Sep 2019
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Firm value: refers to the sum of values of all financial claims on the firm, e. g. debts, warrants, preferred stock, equity. Focuses attention on meeting the demands of all important corporate constituencies, specifies long-term value maximization as the firm"s objective: accepts maximization of long-run value of the firm as the criterion for making the requisite tradeoffs among stakeholders. Issue 1: purposeful behaviour requires the existence of a single -value objective function: achievement of one objective may require the expense of another objective, not logically possible to speak of maximizing both objectives, multiple objectives is no objective. Interest rate at which funds are borrowed or lent determines the value of moving a marginal dollar or resources forward or backward through time. Increases agency costs: gutting the foundations of the firm"s internal control systems, corporate performance measurement and evaluation systems. Families versus markets: the roots of stakeholder theory: development of market system of voluntary and decentralized coordination of human action.