Question

1. If the main goal for a corporation is to Create Value for Investors, why isn’t the main goal to achieve the highest possible net profit, instead?

2. When you compare the Present Value of money to the Future Value, what are some reasonable assumptions and considerations?

3. What impact do Interest Rates have on making Financial Business Decisions?

4. What is a Convertible Bond?

5. What is the difference between Common Stock, and Preferred Stock?

Answer 1

1]

The main goal is not to achieve the highest possible net profit, but to achieve the highest possible value. This is achieved by maximizing cash flows and minimizing the cost of capital.

The actual cash flows generated by the firm are the funds available for distribution to shareholders, not the book profits. The book profits can vary significantly from the actual cash flows available due to the effect of taxes, capital expenditures and non-operating cash flows.

Therefore, higher net profits do not always translate into higher cash flows or higher firm value. Hence, the main goals should be maximization of cash flows, not maximization of book profits