If a company’s board of directors wants management to maximize shareholder wealth, should the CEO’s compensation be set as a fixed dollar amount, or should the compensation depend on how well the firm performs? If it is to be based on performance, how should performance is measured? Would it be easier to measure performance by the growth rate in reported profits or the growth rate in the stock’s intrinsic value? Which would be the better performance measure? Why?

If a company’s board of directors wants management to maximize shareholder wealth, should the CEO’s compensation be set as a fixed dollar amount, or should the compensation depend on how well the firm performs? If it is to be based on performance, how should performance is measured? Would it be easier to measure performance by the growth rate in reported profits or the growth rate in the stock’s intrinsic value? Which would be the better performance measure? Why?

Financial Management: Theory & Practice

16th Edition

ISBN:9781337909730

Author:Brigham

Publisher:Brigham

Chapter1: An Overview Of Financial Management And The Financial Environment

Section: Chapter Questions

Problem 4MC

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Similar questions

If a company’s board of directors wants management to maximize shareholder’s wealth, should the CEO’s compensation be set as a fixed amount, or should the compensation depend on how well the firm performs? If it is based on performance, how should performance be measured? Would it be easier to measure performance by the growth rate in reported profits or the growth rate in the stock’s intrinsic value? Which would be the better performance measure? Why?
What does it mean to say that managers should maximize shareholder wealth "subject to ethical constraints"? What ethical considerations might enter into decisions that result in cash flow and stock price effects that are less than they might otherwise have been?
What does it mean to say that managers should maximize shareholders' wealth "subject to ethical constraints"? What ethical considerations might factor into decisions that result in lower cash flow and stock price effects than they might have otherwise been valued?
Why do you think that wealth maximization is an appropriate goal of the firm? Does it lead to maximization of the wealth of shareholders? Does an attempt by the management to maximize value ofthe firm benefit the society? Explain.
Executive salaries have been shown to be more closely correlated to the size of the firm thanto its profitability. If a firm’s board of directors is controlled by management rather than outside directors, this might result in the firm’s retaining more earnings than can be justifiedfrom the stockholders’ point of view. Discuss those statements, being sure (1) to discussthe interrelationships among cost of capital, investment opportunities, and new investmentand (2) to explain the implied relationship between dividend policy and stock prices.
Can a firm maximize its profit if it is only managed to meet shareholders' interests? (Own words please)
What effect would the calculation performed have in terms of shareholder value? In other words, suppose the company’s goal is to maximize shareholder value. How will the rate of return on equity (increase dividend per share by 1.75) support or inhibit that goal? Be sure to justify reasoning.
what does it mean to say that managers should maximize shareholders wealth subject to ethical constraints?
If markets are truly efficient, does it matter whether firms engage in earnings management? On the other hand, if firms manage earnings, what does that say about management’s view on efficient markets?
A good way to align the incentives of a CEO with those of shareholders is to make his pay directly related to earnings (or cash flows) per share (EPS), since an increase in earnings always leads to an increase in shareholder value. True or False
If a firm could maximize either its current market price or its intrinsic value, whatwould stockholders (as a group) want managers to do? Explain.
Which of the following is NOT a way of stating the overriding goal of financial management? Select one: a. Maximising the value of the firm. b. Maximising the wealth of shareholders. c. Maximing the firm's share price. d. Maximising revenue.