Basics Essay

654 words - 3 pages

Q1. Is maximizing the firm’s profit the only way to maximizing shareholder wealth? Should the firm’s management do anything and everything to maximize shareholder wealth?

Suggested Solution:

Minimizing costs can also be one of the goals of corporations. Other firms may choose to maximize market share, hoping that these will eventually increase the total profits in the future. Ultimately, the choices financial managers make should maximize shareholder wealth, which is achieved by maximizing the stock price.

While the managers should do their best in maximizing the shareholders’ wealth, they should ensure that their behavior is ethical. Ultimately, the owners will ...view middle of the document...

Such relationship exists when a principal engages an agent to represent his or her behalf. Agency problem, also known as principal-agent problem, arises when a conflict of interest is present between owner (or principal) and manager (or agent) because of differing goals.

Since the owner and manager for sole proprietor are one and the same, the principal-agent relationship does not exist and thus no such problem will arise.

There are 2 types of partnership, namely general and limited partnership. The agency problem is unlikely to exist for the former i.e. general partnership because the managers (or general partners) are also the owners.

However, this may not be true for limited partnerships because limited partners do not have management control over the day-to-day operations. In which case, an agency relationship exists and there is a potential conflict of interest between the GPs and LPs.

Q4. When the firm’s management get the board of directors to grant them stock options, are they acting in...

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