what does it mean to maximise the value of a company

Expert Solution

Maximising the value of the company essentially means maximising the value to shareholders. The value of a company can be found using the DCF method where the cash flows are discounted at the WACC (Weighted average cost of capital). Here the growth rate determines the cash flow in the numerator and hence a higher growth rate ensures a higher value for the firm. Similarly a lower WACC ensures a higher value. So reducing the WACC and increasing growth rate can maximize the value of the firm. However, a firm is said to be really maximizing value when the ROE (Return on Equity) exceeds the Cost of equity (ke) and the maximum difference between ROE and Cost of equity ensures maximum value to shareholders.

jeff jeffy answered 1 year ago

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