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Points
%
Score
:
22
/
22 100
9/8/2019 Assignment Print View
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6
.
Explanation
:
Award
:
2 out of 2
.
00 points
We claim that the goal of the firm is to maximize current market value. Could the following actions be consistent with
that goal?
We claim that the goal of the firm is to maximize current market value. Could the following actions be consistent with
that goal?
This action might appear, superficially, to be a grant to former employees and thus not consistent with value
maximization. However, such “benevolent” actions might enhance the firm’s reputation as a good place to work, might
result in greater loyalty on the part of current employees, and might contribute to the firm’s recruiting efforts. Therefore,
from a broader perspective, the action may be value-maximizing.
b.
The reduction in dividends, in order to allow increased reinvestment, can be consistent with maximization of current
market value. If the firm has attractive investment opportunities, and wants to save the expenses associated with
issuing new shares to the public, then it could make sense to reduce the dividend in order to free up capital for the
additional investments.
a.
b
.
c.
d
.
a.
b
.
c.
d
.
The firm adds a cost-of-living adjustment to the pensions of is retired employees.
The firm reduces its dividend payment, choosing to reinvest more earnings in the
business.
The firm buys a corporate jet for its executives.
The firm drills for oil in a remote jungle. The chance of finding oil is only 1 in 5.
The firm adds a cost-of-living adjustment to the pensions of is retired employees.Yes The firm
reduces its dividend payment, choosing to reinvest more earnings in the business.Yes The firm buys
a corporate jet for its executives.Yes The firm drills for oil in a remote jungle. The chance of finding
oil is only 1 in 5.Yes
Yes
Yes
Yes
Yes
a.
c.
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The corporate jet would have to generate benefits in excess of its costs in order to be considered stock-price
enhancing. Such benefits might include time savings for executives and greater convenience and flexibility in travel.
d.
Although the drilling appears to be a bad bet, with a low probability of success, the project may be value-maximizing if a
successful outcome (although unlikely) is potentially sufficiently profitable. A one-in-five chance of success is
acceptable if the payoff conditional on finding an oil field is 10 times the costs of exploration.
