Is Profit Maximization Consistent With Wealth Maximization Finance Essay

Is Profit Maximization Consistent With wealthiness Maximization pay EssayThe objective of the quick is to deem proceedss by shock the take of stakeholders. Generally, ceteris paribus, the objective of the squiffy is to maximize its ultimate jimmy finished gain ground maximation, while incurring the lowest costs. Basically, the ultimate objective of the steadfastly is to shoot level best turn a profits and wealth for its sh beholders. It is definitive to n matchless that, the prize of the firm is signified by the animate mart prices of the corporations common acquit market. In this respect, the maximization of the sh arholders wealth is enhanced by the acquiring of maximum profits at the lowest level of expenditure. As it has been revealed, there exists a truly(prenominal) strong co-relation between profit maximization and wealth maximization, where apiece of them forms part of the objective of the firm. In this case, the total earnings do not re introduce the ultimate value of the corporation hardly the profits accumulated from the employed resources. Generally, any firm would be run towards acquirement of tall profits which re hold its actual wealth for its sh beholders (Westerfield 23-75). Firms exist to hit the needs of stakeholders and to provide an streamlined way of producing in a non-price environment. Firms exist to meet the needs of the populace in an high-octane and a sustainable manner.2. Is profit maximization consistent with wealth maximization? Why or wherefore not?Profit maximization is not consistent with wealth maximization. It has nigh draw punts and cannot be apply for effective evaluation on the performance of the firm.On the different hand, wealth maximization, which is also known as the net present worth of a firm can be used to measure the performance of the firm.Wealth maximization is seen as more comprehensive and blue-ribbon(prenominal) than profit maximization. Profit maximization deals with minimi zing short term profits and is not forward-looking. Again, the profit maximization objective does not actor in sentence value of money considerations. Therefore wealth maximization is superior because it is a yearn term objective and considers the time value of money by throw outing hard currency flows to the present time. Additionally, wealth maximization considers uncertainty by discounting at the required aim of return and considering the other stakeholders of the firm.Profit MaximizationWealth MaximizationIt is not clear on when the profit is counted as profit whether this should be before or after tax. Another uncertainty involves the semipermanent or short-term profit. Short term profit can be foregone by avoiding some expenditure but in the long run, these expenditures engage to be paid for. Therefore long term profit has to be considered, and not short term profit.Wealth maximization shows the present value of benefits minus the cost of the investment.Profit maximiz ation does not factor in in risk. Different objects have different degrees of risk of future earnings. A project with fluctuating earnings is not the same as one with certainty earnings. By not looking at the risk factor of projects, profit maximization cannot be used for the operational objective of the firm.luck is considered in wealth maximization as the discounted order used to limit the present value of future cash flows factors in the risk.Lastly, profit maximization does not factor in the time value of money. A one dollar bill fatigued today is not equivalent to the same dollar spent tomorrow. Cash drawn from a project in different eld is considered the same, which is not realistic.Wealth maximization considers the time value of money as the cash drawn from a project in different long time argon not the same. The discounted tramp that determines the present value of future cash flows shows both risk and time.3. Describe the three main conclusivenesss in corporal Fi nanceThe three main decisions in Corpo order Finance atomic number 18(a) Investment Decision (Allocation)There atomic number 18 two key questions that be looked into when a firm wants to found an investment.What is a good investment? The firm looks at the various investment options in the market, for instance real kingdom investments or carnations investments. The risk involved and the returns to be gained.Where will the firms resources be invested? Here, it is valuable that the firm does not put all their resources into one basket. For instance, the firm may decide to invest a certain percentage of their resources in every stocks or real estate.Further, the pattern and the level of investment would be fixed in which each investment plan is evaluated on the risks involved in concert with its ultimate returns expected. It is fundamental to note that, the pattern of investment would still be an important factor to consider since each individual plan of investment would be ac companied with its benefits and risks.(b) Financing DecisionPrimarily, the monetary decision considers where the firm would raise the funds for these investments. Will the firm use the shareholders/owners funds or borrow from the bank? The mix of equity and debt is what is considered in the backing decision. When, where and how to acquire the money to meet the firms needs.In this case, the finance managers ought to decide on the financing strategy of the firm, in which the evaluation of various sources of finance to cater for the cart track of firms activities would be made. Basically, each source of roof would be evaluated with the level of interests to be paid for the amount of money acquired.Capital Structure Modigliani y milling machine (1958) how much should a firm borrow?(c) Dividend DecisionThe dividend decision is bear on with how much of the firm profits should be given to the shareholders, and how much of it should be reinvested. A dividend policy should be determin ed. the dividends decision would be made in order to determine the amount of the profits to be ploughed back into the firm depending on the amount of profits made (Westerfield 23-75).Dividend policy Modigliani y Miller (1961) another irrelevance propositionAnother finance decision worth mentioning is the liquidity decision, whereby a firm looks at how to manage functional capital and its components.4. What is a burial vault rate? Why is it important?to a fault known as the cut off rate, the burial vault rate is the minimum expected return a firm will consider in accepting investment decisions. If a firms proposal own internal rate of return, r, is greater than the minimum rate of return, k, then it is acceptable. The r is internal to the project while the k (hurdle rate) is external to the project. The hurdle rate is used to make a decision based on the Internal Rate of upshot (IRR) method which takes into account the cash flows occurring at different times and adjusts them match to the time value of money.The hurdle rate is very important as it enhances the planning of the investment patterns and levels since the firm establishes investment patterns which would the highest possible minimum returns. Basically, hurdle rate determines on how to acquire investment capitals as those capital sources with very high interest place would not be stintingal to choose. The hurdle rate represents the internal rate of return of any investment since the finance manager would be in a position to decide on various allocation within the firm, on the basis of the hurdle rate set in the firm.5. What are the main components of a discount rate?The discount rate is the rate at which money values are discounted at various times, within an investment period. Discount rates are comprised of three main components which include the interest rate of money, level of pomposity and risk premiums involved. More specifically, the interests rates at which money capital is allocated c omprises of the discount rates in any projected investment project. Specifically, the interest rate of money is the return got from delaying consumption. More so, the level of inflation in the plain determines the value of money. This is because the level of inflation determines the purchasing power of money, which represents the ultimate value of money. Lastly, risks involved in the investment venture are another important component of the discount rate. Generally, highly risky business ventures would always have high discount rates. In this respect therefore, it would be very important for the finance manager to determine the discount rates to be used in the calculation of the cash-flows in the business venture (Westerfield 23-75).6. Define the efficacious Market HypothesisEfficient market meditation is an investment self-assertion that postulates that, financial markets are efficient in providing education about the market returns from any form of investment. More specifical ly, in efficient market hypothesis, investors are controlled by the existing market conditions in terms of the financial constancy or conditions of the money market. It is important to note that, inflation level and economic conditions of the country determines a lot on the readiness of the financial randomness given by the market in terms of money interests and capital returns. In this regard, investors need to evaluate their investment ventures on the basis of the existing conditions or the information got from the financial markets which are considered to be the completed in providing financial information (Higgins 12-43).7. Describe the three forms of efficiencyThe 3 forms of efficiency are the strong-form efficiency, semi-strong efficiency and weak-form efficiency. In the form weak-form efficiency, all the information in the past stock-price fluctuations is totally shown in the present prices. This means that, the information provided is to equate the current price levels with the past prices.The semi-strong form involves the reflection of all in public available data about the current prices in the market. In this form, there is some information that is withheld among the investors but most of the information is availed to the general public.On the other hand, the strong-form of efficiency in the market reflects all relevant information in the money market, whether withheld or publicly available. Here, the investors have the opportunity to explore in-depth all the trends of the money market in order to make trustworthy information about their investment (Westerfield 23-75).8. What is the difference between expert analytic thinking and rudimentary Analysis?Technical AnalysisFundamental AnalysisTechnical analysis is an appraisal strategy in the money market that looks at the price movements in the market in order to establish their security levels for investors to decide on how to choose their investment plans.Fundamental analysis on the other hand refers to the economic factors facing the money market in which each of the statement is presented in financial statements as opposed to skillful analysis which uses using charts.Technical analysts usually use information set up in charts and graphs to determine the financial worth of the company.Generally, fundamental analysis determines the ultimate value of the company by examining its financial statements like balance sheets and income statements among others. technological analysts use shorter periods of time in their determination of the worth of the companyFundamental analysis involves a log period of time in which the financial worth of the business ought to be devised using subsequent fiscal periods but not one periodInformation derived from (Higgins 12-43)9. Do you believe markets are efficient?I believe that markets are not as efficient as economists reveal that they are. The major reason is because various market conditions are controlled by external factors which they have no control over them. In this respect, it would be difficult to determine the efficiency of the market or to call up the conditions of the market on considerations that, these external factors are also controlled by other forces. For instance, markets are often controlled by inflation rates and interest rates which are factors beyond the control of the market itself. On this consideration, it would be very important for any investor to note the unpredictability of the markets in order to make appropriate investments. There is no perfect information in the market. It is on this basis therefore that I believe that markets are not efficient at all (Westerfield 23-75).10. Efficient Market HypothesisWhich of the following statements are true if the efficient market hypothesis holds?a. It implies that future events can be forecast with perfect accuracy.b. It implies that prices reflect all available information.c. It implies that security prices adjustment for no discernible reason.d. It implies that prices do not fluctuate.If efficient market hypothesis holds, the future events can be forecasted with ease. This is because, all the information concerning stocks in the stock market would be well presented in a more accurate way, to reflect on the subsequent trends expected in the future in the market. In this respect therefore, if the efficient market hypothesis holds, it would enhance loosening in predicting any future trends of investment as the information in the market would be quite reliable. More so, if this hypothesis holds, the information provided would be reflecting all the prices that would be available in the market. This is because every price presented in the market information would greatly imply a predictive disposition of the prices in the future markets. Generally, if the efficient market hypothesis holds, then the above two statements would be true (Higgins 12-43).