Discussion Response

Please respond to following posts.

 

POST 1:

When we think about a business’s success, we often think this success is due to profit maximization. However, this is  common misconception. According to the textbook, profit maximization is not the best goal for a firm to focus on because it is difficult for the firm to define. Profit maximization doesn’t directly reflect the company’s cash flow, and a firm should look to measure their cash flow along with their timing and riskiness, and the market value of the company’s stock.  

A real-life example would be a company who focuses on maximizing owners’ wealth by reducing prices to increase sales, cutting costs where they can and avoiding risks rather than investing in their employees, providing better benefits for employees and other factors that can improve productivity and drive sales. In my experience, I’ve worked for an organization that was more focused on maximizing the wealth of the owners rather than caring about the needs of the employees. Happier employees yields better business. 

Reference:

Parrino, R., Kidwell, D.S., Bates, T., & Gillan, S.L. (2017).  Fundamentals of Corporate Finance (4th Edition). Wiley Global Education US. https://wileyplus.vitalsource.com/books/9781119371434 (Links to an external site.) 

POST 2:

The main reason profit maximization is not the most precise goal of financial management because It does not consider the time value of the money. Time is really important in business for making decision. Since profit maximization does not take in consideration the time value of the money it cannot be the most precise goal of a financial management. The principal objective of a financial management is to make profit by maximizing the shareholder wealth, as well as the price of the firm’s stock which will raise the value of the firm by maximizing its profit and the wealth of the shareholders and owners. The profit maximization does not provide or guarantee that so only the maximizing of the prize of a firm’s stock will maximize the value of a firm and the wealth of its shareholders and owners this is why the role of the financial manager is crucial. In United Sates of America there is three types of businesses: sole proprietorships, partnerships, and corporations. Also there is a structure for each of them. The main goal is to make profit and money by having cash everything is about cash flows. We need cash to buy, invest, paying bills, employees and so on. Time is playing a great part in those decisions making as well as the value of the money in  short and long term. 

Fundamentals of Corporate Finance fourth edition: Robert Parrino, Ph.D.; David S. Kidwell, Ph.D.; Tomas W. Bates, Ph.D.; Stuart Gillan, Ph.D.