Explain the concept of shareholder wealth maximization. Is there a conflict between the goal of shareholder...

Explain the concept of shareholder wealth maximization. Is there a conflict between the goal of shareholder wealth maximization and the financial manager's need to act in an ethical manner? Why or why not?

Solutions

Expert Solution

Shareholders wealth maximization: One of the metric used for shareholders return on investment is ROE (return on equity). ROE is defined as profit after tax divided by the equity capital. The higher the profit after tax, the higher the ROE and more the shareholders wealth maximization. To increase this ROE figure, the manager needs to either increase the revenues or decrease the costs or do both.

In a temptation to increase the revenues, the company might miss-selling the products or overtly increase the price (if monopoly exists), thus acting un-ethical. But in the near future, the customers of the company will punish the company by refusing to use its products. Thus the revenue of the company will decrease, which will decrease profits & ROE figure.

In a temptation to decrease the costs, the company might miss-treat the suppliers of the company by cutting their margins, increase the credit period or not compensating the employees well. This will be un-ethical in nature, and these stakeholders of the company will punish the company in near future. The company will not get credit from the suppliers or the right talent in staff. Hence the profit of the company will decrease, which will decrease the ROE figures.

Hence finance managers need to act in an ethical manner if they want to put a sustained & strong ROE period for longer periods of time.

A perfect example of this is Berkshire Hathway headed by Mr. Warren Buffett. For the last 40 years, he has generated an ROE figure of 20% pa (something unheard of for such a long period of time). He has been very ethical in his practices.

jeff jeffy answered 1 year ago

Next > < Previous

Related Solutions

do you expect the goal of shareholder wealth maximization conflict with efficiency wage theory? Explain your...

do you expect the goal of shareholder wealth maximization conflict with efficiency wage theory? Explain your answer.

Please define and explain the difference between Shareholder Wealth Maximization and Stakeholder Wealth Maximization. Please articulate...

Please define and explain the difference between Shareholder Wealth Maximization and Stakeholder Wealth Maximization. Please articulate your views on what should be management's primary goal(s).

A major advantage of using the maximization of shareholder wealth as the primary goal of the...

A major advantage of using the maximization of shareholder wealth as the primary goal of the firm is that this goal considers the timing and the risk of the expected benefits to be received the investor's consumption utility the value of closely held partnerships all the above

Currently, maximization of shareholder wealth is widely accepted as the primary goal of management.

Chapter 1 Discussion: Primary Goal of ManagementCurrently, maximization of shareholder wealth is widely accepted as the primary goal of management. However, like most economic theories, certain conditions must exist in order for the theory to accomplish its potential . Now, compare the theoretical world with the real world--if you were in charge of management decisions, how might you balance the theory with reality?

Is "profit maximization" consistent with "shareholder-wealth maximization"?

Why should maximization of shareholder wealth NOT be the primary goal? Hint – A common mistake...

Why should maximization of shareholder wealth NOT be the primary goal? Hint – A common mistake is to address a “strawman” instead of the true goal of maximizing shareholder wealth. This is done in some of the articles referenced above. An example of a “strawman” in this case is saying that maximizing shareholder wealth is focusing on the short-term AT THE EXPENSE of the long-term. Since firm value is the present value of ALL EXPECTED FUTURE CASH FLOWS, strategies that...

Which are advantages of focusing on shareholder wealth maximization as the goal of financial management? Check...

Which are advantages of focusing on shareholder wealth maximization as the goal of financial management? Check all that apply: It can be measured objectively. It's an unambiguous goal. It avoids conflicts with other goals. It takes into account both short-term and long-term effects and expectations. What are examples of a possible result of the conflict of interest between shareholders and corporate managers? Check all that apply: Managers paying themselves excessive salaries. Managers faking earnings to temporarily boost the stock price....

1) Describe shareholder wealth maximization. Why is it considered the main goal of a firm?

1) Describe shareholder wealth maximization. Why is it considered the main goal of a firm?2) ) Classify the following two transactions into each of the five categories for financial markets:a) An investor buys shares of a company's stock listed on the NYSE, from another investor.b) U.S. Government sells new Treasury-bills.

Do ethics play a critical role in the financial manager’s goal of shareholder wealth maximization? How...

Do ethics play a critical role in the financial manager’s goal of shareholder wealth maximization? How are the two related? Is the establishment of corporate ethics policies and guidelines, requiring employee compliance, enough to ensure ethical behavior by employees?

Briefly share your thoughts about shareholder wealth maximization. Then, explain the advantages and disadvantages of wealth...

Briefly share your thoughts about shareholder wealth maximization. Then, explain the advantages and disadvantages of wealth maximization from the perspective of a company’s Chief Financial Officer. Include the effect on company stakeholders – internal (managers, employees) and external (suppliers, shareholders). Attention: Make sure that you include the effect on company stakeholders – internal (managers, employees) and external (suppliers, shareholders).

Subjects