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Shareholder Wealth Maximization Model sample essay

Shareholder wealth-maximazation model goals to maximize the present value of the expected future cash flow for the equity owner’s (shareholder). It is the long term business goal and the value for the firm is determined by the amount, timing, and risk of the firm’s expected future profits. For the following events, the value of the firm is : a. New foreign competitors enter the market

The size of market will become large and a lot of companies can supply the goods. There will be no monopoly market and to maintain the profit, firm should reduce the quantity with the same price. But the present value of profit will decrease because total of revenue decrease and automatically reduce the shareholder wealth maximization. This would decrease the value of firm because the entry of new foreign competitors means there will be no monopoly market and the firm will have competitors thus reduce it shareholder wealth maximization.

Strict pollution control requirements are enacted This would decrease the value of firm because strict pollution control requirements means the increasing of the cost thus the reduce the shareholder wealth maximization.

A previously nonunion workforce votes to unionize. This would decrease the value of the firm because the unionization of the workforce would increase the union strike threats with uncertainty of operation. The firm may have to stop it’s operation if the unionization of workforce getting worse thus reduce it shareholder wealth maximization

The rate of inflation increases substantially This would decrease the value of firm because increasing of the rate of inflation means the buyer power will reduce thus the sales of the firm also will reduce so the shareholder wealth maximization will decrease.

A major technological breakthrough is achieved by the firm, reducing its cost of production This would increase the value of firm because a major technological breakthrough can save a lot of dollar thus increase the firm profit. The increasing of the value of firm will increase the shareholder wealth maximization.

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