Answer to Question #57743 in Finance for Noja

Question

1- If the goal of a firm is to maximize the shareholders’ wealth, does that mean that profit is
not important all? Explain your answer.

2- Using debt can help reduce the agency problem that may arise between the management
of a company and its shareholders. How is this possible?

3- By giving one example, describe how corporate social responsibility can be consistent with
effort of the management to maximize the firm’s value.
4- Doing business in the era of globalization exposes a company to more challenges. Give one
example of these challenges and explain the action that a financial company must take to
face the challenge.

Answer 1

1- If the goal of a firm is to maximize the shareholders’ wealth, then the profit is important too, because as the dividents are paid from the retained revenues, then the higher are profit, the better is the shareholders’ wealth.

2- Using debt can help reduce the agency problem that may arise between the management of a company and its shareholders, because if the amount of debt is increased, then the share of equity decreases, so the shareholders may have less power to influence the management of the company.

3- The corporate social responsibility can be consistent with effort of the management to maximize the firm’s value, because it functions as a self-regulatory mechanism which monitors and ensures its active compliance with the spirit of the law, ethical standards and national or international norms, which can help to maximize the firm’s value.

4- Doing business in the era of globalization exposes a company to more challenges. The example of these challenges may be the differences in culture, demands and tastes in different countries, where the company works, so the financial company must use different steps in every country to face the challenge.