Question

What should be done to maximize shareholder wealth and thus the value of the firm?

	a.	Slow down the cash receipt of the organization.
	b.	Increase the risk level of the firm.
	c.	Decrease the size of expected cash flow of the company.
	d.	Raise the free cash flows of the business.

Answer 1

Option (d) is correct

Shareholder wealth or value of the firm can be maximized by raising the free cash flows of the business. The value of the firm can be calculated by the follwoing formula:

Value of the firm = Operating free cash flows after tax_t / (1 + weighted average cost of capital)^t

where, t is the time period.

From the above formula, we can see that if numerator i.e. Operating free cash flows after tax is increased, then value of the firm can be maximized.