Question 2 (40 Marks) “Maximizing shareholder wealth is the main goal of financial management!” was cited...

Question 2 (40 Marks)

“Maximizing shareholder wealth is the main goal of financial management!” was cited by one classmate. Do you agree? Discuss your viewpoints within 500 words. Use examples to illustrate your arguments and justify your conclusion.

Question 3 (40 Marks)

Someone said “Investments with high risk usually come with high return”. Do you agree? Discuss your viewpoints within 500 words. Use examples to illustrate your arguments and justify your conclusion.

Solutions

Expert Solution

Yes I agree ,One of the main objectives of Financial Management is to maximize shareholder’s wealth.

Shareholder's wealth increases with the increase in market value shares and thus it leads to increase in market capitalisation.Financial management is basically concerned with managing the funds of company in such a way that increases the value of company which ultimately increases the shareholder's wealth.Shareholders wealth is directly dependent on the performance of the company and which totally dependent on management of it's funds.The shareholder wealth maximization goal states that management should seek to maximize the present value of the expected future returns to the owners (that is, shareholders) of the firm. These returns can take the form of periodic dividend payments or proceeds from the sale of the common stock. It's example can be manager who takes an appropriate long-term perspective in decision making, rather than focusing only on short -term accounting profits, will recognize responsibility to all of a firm’s constituencies and will help lead the company to the maximization of value for shareholders.

It is truly said as there is positive correlation between risk and return,higher the risk higher the return.As high risk indicates that there is high probability of loss if fails with corresponding return.So it can be said that they are related with each other.If company wants to earn more they need to take more risker projects where return is higher.It needs strong risk appetite level to bear adverse situation.

Example: IPO issued by company whether all information truly disclosed or not to public.Equity linked mutual fund or other schemes where return is uncertain.

Please give thumb otherwise my efforts will be a waste.It means alot.

jeff jeffy answered 1 month ago

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