ASSIGNMENT 2 (ZP04211)

“You may have heard big business criticized for focusing on short-term performance at the
expense of long-term results. Explain why a firm that strives to maximize stock price should be
less subject to an over emphasis on short-term results than one that maximizes profits.”

In my point of view, this is because as we know the stock price always mirrors the value of both

current dividends and future dividends which the shareholders expect to receive. In comparison,

profit use to show the result in current year only and the profit maximizers will their level best to

enhance theirs this year’s profits at the expenses level of future profits. However, always the

stock price maximizers will perform account of the entire cash flow stream that the firm able to

generate. They are more apt which is progressive.

Other than that, a firm that strives to maximize shareholder price will actually lest concerned

with the short term because the earnings charged for the current period usually stolen from future

period. Therefore, it is very clear that, the firm that exceed the expectations are always

appreciated and rewarded while those companies that failed to do so are punishes even more.

This is because of the nature of the stock price which is always like that. Overall, stock price is

considered as the subset of the earnings.

For an organization that maximizes profit, the best outcome is dependably the one that deliver

the most benefit in the present time frame. With this technique, having two times of high benefit

and two times of low benefit is as good as to having four times of medium development,

accepting that the previous produces a similar by and large outcomes.

For example, an author of the journal The Relation Between Analysts' Forecasts of Long Term

Earnings Growth and Stock Price Performance Following Equity Offerings explained that an

organization's stock cost will factor in various factors including the kind of industry the firm

works in, its benefits (or income) are an extremely solid intermediary at the organization's stock

price. In the short run, an organization's stock cost can make little to expansive value

modifications, contingent upon news discharges and profit reports. In short, businesses that want

to maximize their stock price will work toward maximizing earnings over the long term.

For investor’s to see incentives in the shares, they should be guaranteed of progressing results.

This is accomplished by consistency, not by sensational swings, regardless of whether the high

swings are noteworthy.

This clarifies why a firm endeavoring to maximize profit must concentrate more on the short

term, while a firm endeavoring to maximize stock price is better to concentrate on long term

consistency.