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Fire 311 Assignment 1

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1. What does it mean to maximize the value of a corporation?
• To maximize the value of a corporation, one must maximize the stock prices of that corporation, thus maximizing stockholder wealth.
2. In general terms, how is value measured? What three factors determine value? How does each factor affect value?
• Value is measured by the current value of expected cash flows based on return demanded by investors which is dependent on the risk associated with the firm. The 3 factors that determine value are: Market factors, Firm factors, and investor factors. Market factors affect value because it deals with economic conditions, government regulations and rules, and foreign and domestic competitive environments. Firm factors affect value because it deals with revenues and expenses, financing, investment and dividend policies. Investors affect the value because it depends on their income/ savings, age/ lifestyle, it also depends on interest rates and risk attitudes/ preference or rate of return.
3. What is the difference between stock price maximization and profit maximization? Under what conditions might profit maximization not lead to stock price maximization?
• Profit maximization is a short term goal, whereas stock price is a long term goal. Profits can be manipulated in the short term but in the long term result in negative impacts.
4. What are some actions stockholders can take to ensure that management's interests and those of stockholders coincide? What are some other factors that might influence management's actions?
• Stockholders can offer incentive to managers, they can intervene, or even threaten to takeover to motivate manager to act in the stockholder’s best interest. Factor’s that influence management’s decisions include: projected cash flows, timing of cash flow streams, risk of projected cash flows, use of debt, and dividend policy.
5. If you

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