1.3 The Primary Objective of the Corporation: Value Maximization

Question 1

(1.3) What should be management’s priority objective?

Answer 1

stockholder wealth maximization

Question 2

(1.3) What should be the primary objective of the corporations?

Answer 2

maximizing the value of the firm

Question 3

(1.3) The market price is the stock price we observe in the ______ markets.

Answer 3

financial

Question 4

(1.3) If the market price reflects all relevant information, then the observed price is also the _____ or ________ price.

Answer 4

intrinsic; fundamental

Question 5

(1.3) When we say management’s objective should be to maximize stockholder wealth, we really mean it is also to maximize the _____ price of the firm’s _____ _____, not the current market price.

Answer 5

fundamental; common stock

Question 6

(1.3) What are some reasons that maximizing the fundamental stock price benefit society?

Answer 6

(1) To a large extent, THE OWNERS OF STOCK ARE SOCIETY
(2) CONSUMERS BENEFIT because stock price maximization requires efficient, low-cost businesses that produce high-quality goods and services at the lowest possible cost
(3) EMPLOYEES BENEFIT because companies that successfully increase stock prices also grow and add more employees, thus benefitting society