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6 Jul 2018

Chenchen believes that to maximize shareholder wealth, management needs to focus on profit maximization, because ultimately stock price is driven by accounting profits?

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Beverley Smith
Beverley SmithLv2
9 Jul 2018

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Since shareholder wealth is the present value of the expected future returns to the owners of the business. The primary normative goal of the firm is to make the most efficient use of the firm’s scarce financial and physical resources and thereby to maximize shareholder value. Thus, realization of the shareholder wealth maximization goal is constrained by social responsibility concerns and problems arising out of agency relationships. Since the class comprises of students spanning different majors we should know that managers can take a variety of actions to influence the magnitude, timing, and risk of the firm’s free cash flows. These actions are often classified in the context of operating, investment, financing, and dividend decisions. Would you agree?

What is the market price of a share of stock for a firm that pays dividends of $1.20 per share, has a P/E of 14, and a dividend payout ratio of 0.4?

The Market Value Added (MVA) is the ____.

  1. indicator of how successful a firm has been at increasing its financing its assets
  2. return on total capital minus cost of capital
  3. indication of an increase in operating efficiency
  4. positively related to the present value of all expected future EVA.

For our purpose, Shareholders' Value Maximization will be the preferred goal for all of the following reasons EXCEPT:

  1. The shareholders' value maximization goal deals with accounting profit, while the profit maximization goal attempts to make cash available to meet financial needs.
  2. Shareholders' value maximization is a long-run goal and the public image of the corporation may be of deep concern to shareholders including the wealth effect
  3. The effects of all financial decisions are reflected in the price of the stock being traded in efficient markets
  4. The complexities and uncertainties in the external environment are all absorbed in the value of the stock.

Complete the following tasks:

  • Locate one publicly traded corporation that you believe is maximizing shareholder wealth. Using financial ratio analysis, justify why you believe the corporation is maximizing shareholder wealth.
  • Locate one publicly traded corporation that you believe is not maximizing shareholder wealth. What is the market price of the stock of this corporation? How does it compare with the intrinsic value of the corporation? Justify why you believe the corporation is not maximizing shareholder wealth. Calculate and analyze the following thirteen financial ratios of the corporation and compare them to the appropriate industry average:
  • Current ratio
  • Quick ratio
  • Cash ratio
  • Total debt ratio
  • Times interest earned ratio
  • Cash coverage ratio
  • Inventory turnover ratio
  • Receivables turnover ratio
  • Profit margin
  • Return on assets
  • Return on equity
  • Price-earnings ratio
  • Market-to-book ratio

Create a plan of action to get the corporation back to where the corporation is maximizing shareholder wealth. What do you anticipate will be the market price of the corporation

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