ks People Window Help Word-FIN 3 x/ OTple: Module 1: Discu 6921 uncp.edu/co es/1

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ks People Window Help Word-FIN 3 x/ OTple: Module 1: Discu 6921 uncp.edu/co es/1744/di The Primary O ctive of the Corporation: Value Maximization Maximizing the value of the firm should be the primary objective of the corporations. . The market price is the stock price that we observe in the financial markets. If the market price reflects all relevant information, then the observed price is also the fundamental, or intrinsic, price. . The same actions that maximize fundamental stock prices usually benefit society. Reasons include: To a large extent, the owners of stock are society . Consumers benefit because stock price maximization requires efficient, low-cost businesses that . produce high-quality goods and services at the lowest possible cost. Employees benefit because companies that successfully increase stock prices also grow and add - more employees, thus benefiting society. Free cash flows (FCF) are the cash flows that are available for distribution to all of a firm's investors (stockholders and creditors) after the frm pays expenses, pays taxes, and makes the necessary investments to support growth. : Three factors primarily determine free cash flows: (1) sales revenues, (2) operating costs and taxes and (3) required investments in operating capital. FCF-sales revenues-operating costs-operating taxes-required investments in operating capital Managers can enhance their firms' values (and stock prices) by increasing the size of the expected free cash flows, by speeding up their receipt, and by reducing their risk. The weighted average cost of capital (WACC) is the average return required by all of the firm's investors (stockholders and creditors). It is affected by the firm's capital structure (the firm's relative amounts of debt and equity financing), interest rates, the firm's risk, the market's overall attitude toward risk. The relationship between a firm's fundamental value, its free cash flows, and its cost of capital is defined by the following equation . . . Please Discuss this topic and post your argument by Saturday 11:59 pm to get full credit. Instructions MacBook A

Explanation / Answer

The points mentioned regarding wealth maximisation are absolutely correct. Value maximisation is a much broader and preferred objective over profit maximisation which takes into account only the earning per share. The later is not suitable and healthy for a going concern business in the long run. The former involves working hard towards increasing the price of share and that is only possible when the business is delivering its best and its customers and other stakeholders are satisfied. Maximisation of shareholder's value should be the one of the important objectives of any business if not the ultimate. Free cash flow is the cash available in the hands of management through its operations after company has paid for its operating expenses and capital expenditures. The magnitude of free cash flows displays the level of cash available in the hands of firms for paying dividends or funding share repurchases. FCF has a direct relationship with increasing the value of firm. Using the constant growth model for a growing firm, the value of firm can be derived. The WACC is indeed the cost of capital for the firm taking into considerations the cost of all its capital sources which may involve a variety of sources such as equity, debt, preference shares and retained earnings.

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