CHAPTER 1

REVIEW QUESTIONS

3. Shareholder wealth maximization is concerned with making investing, financing and

dividend decisions that would maximize the current value per share of the existing stock or
ownership in a business firm. It takes into consideration the risk factors that jeopardizes the
firm’s goal, in contrary to profit maximization. Profit, alongside dividend distribution and
retention of profits, return on investments, risk and time value of money, all future cash flows,
is just a subset or ground facilitating “wealth.” Thus, wealth maximization is a better goal of a
firm than profit maximization as the latter only concerns producing maximum output with
limited inputs thereby, ignoring risk factors and the concept of time value of money and merely
focusing on the immediate effect rather than future or effects in the long-run. Moreover, the
former can be measured by the target attainable combination of dividends per share and share
price appreciation.

5. Managers are supposed to make decisions for the best interest of the shareholders,
rather than make decisions for the best interest of themselves. However, since managers
control the day-to-day operations of the firm, stockholders cannot see the decisions these
managers may make. They sometimes make decisions based on what they just believe they can
actually do to serve the best interest of the shareholders. However, there are no standard rules
that indicate which course of action should be followed by managers to achieve the firm’s goal.
Hence, shareholders may set goals that undertakes great amount of risk, yet the manager can
set otherwise to avoid the risk for own self-interest more than that of shareholders’.

11. Cost control refers to the practice wherein firm’s expenses are identified and reduced to
increase profits thereby, maintains and improves profitability. However, the mean of achieving
this includes activities which harms the environment. For example is the factories, producing
the firm’s high-demand and profitable products, emit harmful gases like greenhouse gases.
Thus, achieving its best result may be prevented by acquiring equipment which could destroy
those pollutants, convert into a less harmful compound or removes those from the waste air
before it releases into the atmosphere or environment as a whole. As a result, there will be
incurred additional cost rather than reduction which in turn will also decrease profits.

14. One of the non-financial aspects of managers’ role in society is empathy towards his
workers. Because sometimes, there are some managers who keep their workers up until they
finish what they need to, regardless of the situation, time and other constraints just to
maximize their time of operations. Another is that, a manager should exercise equality,
especially when it comes to gender and race. Since there have been managers who stereotype
the capabilities and incapacities of men and women. What I mean to say is the way he sees
them, such that women cannot do what men do and vice versa. Moreover, on the issue of race,
it shouldn’t be a basis of how managers see them. For example, a black American applies to a
firm, yet he wasn’t hired for the basis of his color or race not by his experience, skills, and other
qualifications.

MULTIPLE CHOICE

1. C
2. B
3. B
4. C
5. C