The CEO of the company you are interning for states that her number one goal for the year is to maximize the company's profit.

Is that the same thing as maximizing shareholder value?

Why or why not?

Give an example of something the company could do that would lead to higher profits thisyear, but would actually harm shareholder value maximization in the long term.

Question

Business

Kimberly Vaughan

10 December, 16:43

The CEO of the company you are interning for states that her number one goal for the year is to maximize the company's profit.

Is that the same thing as maximizing shareholder value?

Why or why not?

Give an example of something the company could do that would lead to higher profits thisyear, but would actually harm shareholder value maximization in the long term.

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Answers (1)

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Derrick Griffin · Answer 1

Profit maximization objective can easily be manipulated and it is highly subjective. Management may decide to avoid some costs in the short-term such as Investment in Assets, Investment in R &D and other discretionary cost in order to have an impressive profit performance. In the long-run, the avoidance of this cost now may reduce the earnings capacity of the company assets.

Using profit as measure of performance for manager may encourages dysfunctional behavior.

In the true sense, profit generation may not translate into increase in the value of the company. For example, management may decide to reduce depreciation charge, decide to over state revenue or over valued inventory

On other hand, maximizing shareholder value is a long-term and sustainable objective that involved investing in viable projects with positive net present value to enhance the value of the company.

When this is used as a performance measure, it very difficult to manipulate in the short-term.