Question
In: Finance
Why is maximizing current share price not equivalent to maximizing long- term value?
Why is maximizing current share price not equivalent to maximizing long- term value?
Solutions
Expert Solution
The current share price is driven by the market forces of demand and supply. The share price will increase if there is an increase in the demand for the stock. The current share price can be increased with positive news about the future growth prospects of the company. So if the management releases positive news it generally has an impact on the current share price.
However this does not reflect the value of the company since that is determined by the intrinsic value and discounted future cash flows of the business. The long-term value of a company is determined by discounting future cash flows at a predetermined opportunity cost of capital. Hence a company can increase and maximize its current share price but the long term value of a company is determined by it's intrinsic value. Maximization of long term value of the company is determined by the growth rate. Higher the growth rate higher will be the long-term value of the business and vice versa.
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Long-Term Debt (in
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Equity (in
millions)
Debt-to-Equity
Ratio
Net Income (in
millions)
EPS
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018 if avaliable
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2008
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2010
2011
2012
2013
2014
2015
2016
2017
2018 if avaliable
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