(1) What is the goal of the firm? What are some of the problems involved in the use of profit maximization as the goal of the firm? How does the goal of maximization of shareholder wealth deal with those problems?
Maximizing shareholder wealth just means modifying the goal of profit maximization to address the complexities of the operating environment. Shareholder wealth maximization is the best choice for the main goal of a business because the effects of all financial decisions are included in these decisions. The primary goal of the firm is to maximize shareholder wealth. Profit maximization is used more as a theoretical goal. It ignores too many real-world issues that must be addressed in decision making. The goal of profit maximization ignores two major factors which are timing and uncertainty. Using profit maximization projects and investments are compared by examining expected values, not whether one project is riskier than the other. Profit maximization also ignores the timing of a project’s returns. It inappropriately ignores future profit if the goal is concerned about the profit for the current year. The goal of maximization of shareholder wealth deals with the problems brought up by profit maximization in quite a simple way. Since shareholder wealth maximization focuses on raising the market value of the existing shareholders’ common stock investors have to be careful with their decisions. With this goal, good decisions are those that create wealth for the shareholder. As long as the firm is keeping their shareholders’ wealth as high as they can, they know they are making sound decisions for the firm.
(2) Identify the primary characteristics of a sole proprietorship, partnership, and corporation.
A sole proprietorship is a business that is owned by one person. The owner maintains title to assets is responsible for any liabilities incurred. The proprietor is entitled to any profits from the business, but also takes any hits that...
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