Chapter 1, Problem 1RQ

What are some of the problems involved in implementing the goal of maximization of shareholder wealth?

Summary Introduction

To discuss: The problems involved in implementing the goal of maximization of shareholder wealth.

Explanation of Solution

The problems involved in implementing the goal of maximization of shareholder wealth are as follows:

One such problem is maximization of the market value of the company's common stock. Numerous things influence the price of stock, so distinguishing which changes in the price of stock is because of the decisions made by the management and which changes are because of outside factors, for example, the state of the economy might be troublesome.

There may likewise be vulnerability about the inevitable financial pay-off of certain business investments. The investors and managers may have distinctive time horizons and diverse risk inclinations, which can influence their firm valuation. Moreover, managers may not generally act to the greatest advantage of investors, an exemplary instance of an agency issue.