Af201

uestion 1

a.) Profit maximization focuses on the business and management to maximize the difference between the revenues and expenses. It focuses on the short term goals of the business, does not consider the risks of operation and rely on the accounting numbers that are profits. On the other hand, wealth maximization implies that the business is managed in such a way that the present value of the future cash flows discounted at a particular rate to be maximized therefore taking into account the long term goals of the business which does consider the risks of the operation and considers the cash flows of the business with regards to time value of money. Looking through the article of ABC, it shows that the major focus of the business is profit maximization as the profits are increasing but the share prices are not increasing.

b.) Yes there is an agency problem with regards to the article. This is because the goals of the managers are not in line with the goals of the business. According to the article of ABC, the management has focused on profit maximization so that they can increase the profit hence increasing their earning. This shows that managers are looking into their own benefits where their major goal should have been to maximize the goals of the shareholders that are to maximize wealth.

c.) No the policy of ABC does not seem to be ethical, this is because the business is not willing to pay for the damaged caused by the business. This is unethical because it is the environment and the people of the community that has made the business a success and hence not taking into account corporate social responsibility might lead to the failure of the business. The main motive of the business is to maximize wealth therefore corporate social responsibility is very essential to attract customers, potential investors as well as government subsidies that will indeed in the long run maximize the wealth of the business.

d.) Incurring expenses to control pollution is the...