Question

In: Finance

Answer the questions given in the two options below. a) Why is the financial purpose of...

Answer the questions given in the two options below.

a) Why is the financial purpose of the firm determined as "firm value maximization" instead of "making profit"? Discuss.

b) Why is a financial decision taken from the concept of "cash flow" rather than profit? Discuss.

Solutions

Expert Solution

A.financial purpose of a firm is determined as form of value maximization because a firm is always focused at maximization of the value of the company because it is sustainable in the long run and it is beneficial for the interest of the all stakeholders.

Profit making is just focused at maximization of the value of the shareholders and the company employees job protection, but it is not protecting the interest of the society and other stakeholders so value maximization is a wider concept which is need to be adopted by the many companies in order to make an ethical approach to sustainable development which should be beneficial in the long run for the company rather than having a short sighted view of profit maximization

B.financial decision taken from perspective of the cash flows because there are many companies who are generating a lot of cash flows but still they are not able to make a lot of profits, because profit making is never the primary objective of the organisation in the short run as many companies undertake various growth and expansion project in order to maximize their overall value so that those company wood be reporting losses and if we are valuing a company through profit perspective then we would not be able to value those companies so, cash flow perspective to value a company is the best approach in order to maximize the value of companies.


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