Discussion_01 - DiscussionIssuesandDerivations 1. What is...

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Discussion Issues and Derivations 1. What is the difference between stock price maximization, firm value  maximization and stockholder wealth maximization? Stock   price   maximization   is   the   most   restrictive   of   the   three   objective  functions.   It   requires   that   managers   take   decisions   that   maximize  stockholder wealth, that bondholders be fully protected from expropriation,  that   markets   be   efficient   and   that   social   costs   be   negligible.   Stockholder wealth maximization is slightly less restrictive, since it does not  require   that   markets   be   efficient.   Firm   value   maximization   is   the   least  restrictive, since  it does  not  require  that  bondholders  be protected  from  expropriation. Thus,   when   we   make   the   argument   that   an   action   by   a   firm   (such   as  investing or financing) increases firm value, this increase in firm value will  necessarily translate into increasing stockholder wealth and stock price only  if the more restrictive assumptions hold. Conversely, an action that increases  the stock price in a world where the less restrictive assumptions do not hold,  may not necessarily increase firm value.  2. What is the objective function in corporate finance for a private firm?  The objective of maximizing stock prices is a relevant objective only for firms,  which are publicly traded. How, then, can corporate finance principles be 
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This note was uploaded on 04/25/2011 for the course FIN 421 taught by Professor Anupchowdhury during the Spring '11 term at BRAC University.

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Discussion_01 - DiscussionIssuesandDerivations 1. What is...

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