Fundamentals of Financial Management (MindTap Course List)
15th Edition
ISBN: 9781337395250
Author: Eugene F. Brigham, Joel F. Houston
Publisher: Cengage Learning
expand_more
expand_more
format_list_bulleted
Question
Chapter 1, Problem 7Q
Summary Introduction
To identify: The stockholder wealth maximization thought of as long-term or a short-term goal.
Stockholder Wealth Maximization: The stockholders are the ultimate owner of the company and the management of the company should act on the behalf of stockholders. Stockholder wealth maximization means increasing the value of the firm’s stock value by properly utilizing the stockholders fund.
Expert Solution & Answer
Trending nowThis is a popular solution!
Students have asked these similar questions
Should stockholder wealth maximization be thought of as a long-term or a short-term goal? For example, if one action increases a firm’s stock price from a current level of $20 to $25 in 6 months and then to $30 in 5 years but another action keeps the stock at $20 for several years but then increases it to $40 in 5 years, which action would be better? Think of some specific corporate actions that have these general tendencies.
Financial ratio analysis is conducted by three main groups of analysts: credit analysts, stock analysts, and managers. What is the primary emphasis of each group, and how would that emphasis affect the ratios they focus on?
Why might it be rational for a small firm that does not have access to the capital markets to use the payback method rather than the NPV method?
A small firm intends to increase the capacity of a bottleneck operation by adding a new machine. Two alternatives, A and B, have been identified and the associated costs and revenues have been…
In case you retain huge amount of profit of your company for long term investment, what financial decision do you take – to pay high cash dividend? Or to issue bonus share (stock dividend)? And explain why?
If a company’s board of directors wants management to
maximize shareholder wealth, should the CEO’s compensation be set as a fixed dollar amount, or should the compensation depend on how well the firm performs? If it is to be based on performance, how should performance is measured? Would it be easier to measure performance by the growth rate in reported profits or the growth rate in the stock’s intrinsic value? Which would be the better performance measure? Why?
Chapter 1 Solutions
Fundamentals of Financial Management (MindTap Course List)
Knowledge Booster
Similar questions
- Suppose you are valuing a healthy, growing, profitable firm and you project that the firm will generate negative free cash flows for equity shareholders in each of the next five years. Can you use a free-cash-flows-based valuation approach when cash flows are negative? If so, explain how a free-cash-flows approach can produce positive valuations of firms when they are expected to generate negative free cash flows over the next five years.arrow_forwardWhen considering a top-down approach to fundamental analysis, the impact of macroeconomic factors on a stock’s price can have which of the following effects? an increase in real GDP is followed by improvement in current and expected future profits for companies, leading to higher stock price. an increase in real GDP is followed by performance of industries and subsequent improvement in current and expected future profits for companies, leading to higher stock prices. an increase in real GDP, followed by a significant performance of cyclical industries such as automobile and consumer discretionary, will lead to higher stock prices.arrow_forwardIf a company’s board of directors wants management to maximize shareholder’s wealth, should the CEO’s compensation be set as a fixed amount, or should the compensation depend on how well the firm performs? If it is based on performance, how should performance be measured? Would it be easier to measure performance by the growth rate in reported profits or the growth rate in the stock’s intrinsic value? Which would be the better performance measure? Why?arrow_forward
- Analysts and investors often use return on equity (ROE) to compare profitability of a company with other firms in the industry. ROE is considered a very important measure, and managers strive to make the company’s ROE numbers look good. A) If a firm takes steps that increase its expected future ROE, its stock price will increase. B) Based on your understanding of the uses and limitations of ROE, which of the following projects will a manager likely choose if his or her bonus is solely based on the ROE of the next project? Project Y, with 40% ROE and a small investment, generating low expected cash flows Project X, with 35% ROE and a large investment, generating high expected cash flows C) Suppose you are trying to decide whether to invest in a company that generates a high expected ROE, and you want to conduct further analysis on the company’s performance. If you wanted to conduct a comparative analysis for the current year, you would: Compare the…arrow_forwardAnalyze the dividend policy of RIL for shareholders’ wealth maximization and advise on an optimal dividend policy to ensure shareholders’ wealth is maximized:1. What type of dividend policy has RIL been following?2. Does RIL look after its shareholders’ interests? How?3. What factors should a company consider when planning its investment budget? Study the impact of RIL’s dividend policy on its share price performance and discuss the relevance of dividend theory for RIL:4. What factors affect the market price of a company?5. Is RIL’s market performance guided by its dividend policy or by other factors as well? What is the evidence to support your conclusion?6. In the long run, what quantum effect does a dividend policy have on a company’s share price?arrow_forwardYou are the CFO of a profitable firm that is financially constrained. The stock market is currently going through a boom phase (assume this is a bubble). From what you have learned in this course, you know that the rational decision would be to issue new shares and use this income to pursue positive NPV projects. Before you make this decision, what is the most important variable that you would examine Assume you have information on all these variables. Select one: O a. Market Q O b. Fundamental Q O c. Elasticity of price demand for common shares O d. Cash Savingsarrow_forward
- Discuss the topic of maximizing shareholder wealth. This topic has been researched and studied for many years, with mixed results. For example; Irving Fisher, a prominent American Economist, argued that maximizing shareholders wealth should be management’s primary goal. Conversely, Sollars and Tuluca suggested that shareholders should only be rewarded with returns that are commensurate with the risk they take. Explain the advantages and disadvantages of wealth maximization from the perspective of a company’s Chief Financial Officer. Include the effect on company stakeholders – internal (managers, employees) and external (suppliers, shareholders).arrow_forwardIn a few sentences, answer the following question as completely as you can. Given our goals of firm value and shareholder wealth maximization, we have stressed the importance of NPV. Yet many financial decision makers at well-known firms continue to use less desirable measures (such as payback period) rather than more desirable measures (such as payback period and AAR, in addition to the NPV and IRR). Why do you think this is the case?arrow_forwardAs companies evolve, certain factors can drive sudden growth. This may lead to a period of nonconstant, or variable, growth. This would cause the expected growth rate to increase or decrease, thereby affecting the valuation model. For companies in such situations, you would refer to the variable, or nonconstant, growth model for the valuation of the company's stock. Consider the case of Portman Industries: Portman Industries just paid a dividend of $2.40 per share. The company expects the coming year to be very profitable, and its dividend is expected to grow by 12.00% over the next year. After the next year, though, Portman's dividend is expected to grow at a constant rate of 2.40% per year. Assuming that the market is in equilibrium, use the information just given to complete the table. Term Dividends one year from now (D1) Horizon value (P1) Intrinsic value of Portman's stock Value The risk-free rate (TRF) is 3.00%, the market risk premium (RPM) is 3.60%, and Portman's beta is 1.70.…arrow_forward
- As companies evolve, certain factors can drive sudden growth. This may lead to a period of nonconstant, or variable, growth. This would cause the expected growth rate to increase or decrease, thereby affecting the valuation model. For companies in such situations, you would refer to the variable, or nonconstant, growth model for the valuation of the company's stock. Consider the case of Portman Industries: Portman Industries just paid a dividend of $2.40 per share. The company expects the coming year to be very profitable, and its dividend is expected to grow by 20.00% over the next year. After the next year, though, Portman's dividend is expected to grow at a constant rate of 4.00% per year. Assuming that the market is in equilibrium, use the information just given to complete the table. Term Dividends one year from now (D₁) Horizon value (P₁) Intrinsic value of Portman's stock The risk-free rate (TRF) IS 5.00%, the market risk premium (RPM) is 6.00 %, and Portman's beta is 1.30. What…arrow_forwardAs companies evolve, certain factors can drive sudden growth. This may lead to a period of nonconstant, or variable, growth. This would cause the expected growth rate to increase or decrease, thereby affecting the valuation model. For companies in such situations, you would refer to the variable, or nonconstant, growth model for the valuation of the company's stock. Consider the case of Portman Industries: Portman Industries just paid a dividend of $2.40 per share. The company expects the coming year to be very profitable, and its dividend is expected to grow by 20.00% over the next year. After the next year, though, Portman's dividend is expected to grow at a constant rate of 4.00% per year. Term Value The risk-free rate (RF) is 5.00%, the market risk premium (RPM) is 6.00%, and Portman's beta is 1.70. Dividends one year from now (D1) Horizon value (P1) ☑ Intrinsic value of Portman's stock ་ Assuming that the market is in equilibrium, use the information just given to complete the…arrow_forwardAs companies evolve, certain factors can drive sudden growth. This may lead to a period of nonconstant, or variable, growth. This would cause the expected growth rate to increase or decrease, thereby affecting the valuation model. For companies in such situations, you would refer to the variable, or nonconstant, growth model for the valuation of the company’s stock. Consider the case of Portman Industries: Portman Industries just paid a dividend of $2.40 per share. The company expects the coming year to be very profitable, and its dividend is expected to grow by 20.00% over the next year. After the next year, though, Portman’s dividend is expected to grow at a constant rate of 4.00% per year. Assuming that the market is in equilibrium, use the information just given to complete the table. Term Value Dividends one year from now (D₁) Horizon value (Pˆ1P̂1) Intrinsic value of Portman’s stock The risk-free rate (rRFrRF) is 5.00%, the market risk…arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
Financial Reporting, Financial Statement Analysis...FinanceISBN:9781285190907Author:James M. Wahlen, Stephen P. Baginski, Mark BradshawPublisher:Cengage Learning
Principles of Accounting Volume 1AccountingISBN:9781947172685Author:OpenStaxPublisher:OpenStax College
EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT
Financial Reporting, Financial Statement Analysis...
Finance
ISBN:9781285190907
Author:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw
Publisher:Cengage Learning
Principles of Accounting Volume 1
Accounting
ISBN:9781947172685
Author:OpenStax
Publisher:OpenStax College
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:9781337514835
Author:MOYER
Publisher:CENGAGE LEARNING - CONSIGNMENT