Question

a.) Why do we focus on maximizing the shareholder wealth rather than short- term profit maximization?

b.) What is the difference between maximize the EPS (earnings per share) and maximize stock price?

c.)What is the agency conflict between manager and shareholder and how can we reduce this agency conflict?

Answer 1

a)The fundamental target of organization ought to of wealth maximization rather than profit maximization as there is consistently risk related in accomplishing profit. The risk can be dismissed in short run yet can't be disregarded in since a long time ago run. Shareholders who put their funds in organization for better returns and in the event that they don't see anything is being done to expand their funds. They will contribute elsewhere. In this way, profit maximization ought to be considered as a sole boundary yet wealth maximization ought to be the principle rationale of any firm. Profit maximization is a subset of wealth maximization and its essential for the endurance in the market however with regards to choices which will straightforwardly influence the enthusiasm of the investors at that point, wealth maximization is a superior employable model.

b)The EPS is the proportion of profitability of the organization. It is the current profit or net gain of the organization divided by the shares outstanding. At the point when the EPS is boosted it doesn't augment the investors wealth. It gauges the current profits however overlooks the future situation of the organization. The EPS doesn't catch the fate of the organization. Now and again the declaration of merger increases the stock price quickly yet it might bring down the EPS of the organization for present. As organizations are possessed by investors hence the point ought to be expanding shareholders wealth or amplifying the stock price. The stock price is the current estimation of the firm. In general the stock price is the discounted sum of all future cash ows therefore it depends on any of the decisions taken by the management of the company today.

c)The agency problem is a conflict of interest intrinsic in any relationship where one party is relied upon to act to another's greatest advantage. Under corporate finance, the agency problem usually alludes to a conflict of interest between a company's management and the company's shareholders.

One way corporations can reduce agency conflicts is with bond convenants. These are agreements that commit the corporation to follow approaches that protect the bondholders. They can include both positive and negative convenants.