Maximizin g the value of the firms stock is an unambiguous objective that is

Maximizin g the value of the firms stock is an

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Maximizin g the value of the firm’s stock is an unambiguous objective that is easy to measure. We simply look at the market value of the stock in the newspaper on a given day to determine the value of the stockholders’ shares and whether it went up or down. Publicly traded securities are ideally suited for this task because public markets are wholesale markets with large numbers of buyers and sellers where securities trade near their true value. What about firms whose equity is not publicly traded, such as private corporations and partnerships? The total value of the stockholder or partner interests in such a business is equal to the value of the owner’s equity. Thus, our goal can be restated for these firms as this: maximize the current value of owner’s equity. It is important to recognize that maximizing the value of stock, or owner’s equity, is not necessarily inconsistent with maximizing the value of claims to the firm’s other stakeholders. For example, suppose the managers of a firm decide to delay paying suppliers in an effort to increase the cash flows to the firm’s owners. An action such as this is likely to be met by resistance from suppliers who might increase the prices they charge the firm in order to offset the cost of this policy to them. In the extreme, the suppliers might stop selling their products to the fi rm and both the firm’s owners and the suppliers can end up worse off. Consequently, in maximizing the value of the owner’s equity, managers make decisions that account for the interests all stakehold ers. Quite often, what is best for the firm’s owners also benefits other stakeholders
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___________________________________________________________________________________________________________________ Page 11 of 19 IPK COLLEGE 1664, JALAN KULIM, 14202 BUKIT MERTAJAM, PENANG TEL : 012-5203212 / 0125113212 / 04-5512588 Subject: Financial Management (DFM1) Prepared by: Susan Lim Email : [email protected] (3) Can Management Decisions Affect Stock Prices? Yes. As noted earlier, a basic principle in finance is that the value of an asset is determined by the future cash flows it is expected to generate. A firm’s management makes numerous decisions that affect its cash flows. For example, management decides what type of products or services to produce and what productive assets to purchase. Managers also make decisions concerning the mix of debt and equity financing the firm uses, debt collection policies, and policies for paying suppliers, to mention a few. In addition, cash flows are affected by how efficient management is in making products, the quality of the products, mana gement’s sales and marketing skills, and the firm’s investment in research and development for new products. Some of these decisions affect cash flows over the long term, such as the decision to build a new plant, and other decisions have a short-term impact on cash flows, such as launching an advertising campaign
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___________________________________________________________________________________________________________________ Page 12 of 19 IPK COLLEGE 1664, JALAN KULIM, 14202 BUKIT MERTAJAM, PENANG TEL : 012-5203212 / 0125113212 / 04-5512588 Subject: Financial Management (DFM1) Prepared by: Susan Lim Email : [email protected]
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  • Spring '17
  • JANE KDAL

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