Shareholder Wealth Maximization

In the context of the shareholder wealth-maximization model of a firm, what is the expected impact of each of the following events on the value of the firm? Explain why.

a. New foreign competitors enter the market.

Answer:

If there will be new foreign competitors in the market, the competition will become tougher and the firm may lose the market share to the new foreign competitors. To maintain its market position, the firm has to reduce its selling price and the sales revenue will decrease if the sold quantity doesn’t increase. Therefore, the present value of profit will decrease, which reduce the shareholder wealth.

b. Strict pollution control requirements are implemented by the government.

Answer:

If the government implements strict pollution control requirements, the firm has to take some measures to meet the government requirements, thus, the cost of the firm will be increased and then the shareholder wealth will be decreased.

c. A previously nonunion workforce votes to unionize.

Answer:

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 its operation if the unionization of workforce getting worse thus reduce it shareholder wealth maximization.

d. The rate of inflation increases substantially.

Answer:

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.