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Corporate Goals: shareholder wealth maximization

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Explain the assumptions and objectives of the shareholder wealth maximization model. Shareholder wealth maximization is considered as a fundamental model that guides the half of the world’s market and corporations. As stated by Eiteman, The Anglo-American markets are of the view that the firms should follow SMW. As discussed in, Shareholder Wealth Maximization model assumes that in order to increase the wealth of a firm, the business managers should “maximize the return to the shareholders” for a certain level of risk. Similarly, the risk to the shareholders should also be minimized for a given rate of return.

The main objective of this model is to increase the stock price which would in return increase the net worth of the individuals who own the stocks in the firm. However, this model also enables the corporations to take into account the risk factor while making investment decisions. This not only helps to serve the interests of the shareholders but also ensures the security to the shareholders. High leverage How would a high degree of leverage (debt/assets) be viewed by the shareholder wealth maximization model compared to the stakeholder capitalization model?

High leverage means that the company is at a financial risk because it means how much debt a company has as compared to its assets. High leverage, as stated in chapter 4, is very important and is perceived differently by both models. As we know that high leverage can increase the risk of bankruptcy. It can simultaneously put the corporations and stakeholders at a risk and also increases the possibility of a greater return for the shareholders. The shareholder maximization model looks at high leverage from a different perspective.

Although high leverage increases the risk related to the investment, the shareholders get advantage because of the compensation they get in return of the risk. On the other hand, stakeholder capitalization model does not welcome high leverage because they are of the opinion that it only benefits the shareholders as they can diversify their portfolio and the stakeholders have to face the results and consequences if the company goes bankrupt. Q18 Emerging markets corporate governance improvements: In recent years emerging market MNEs have improved their corporate governance policies and become more shareholder-friendly.

What do you think is driving this phenomenon? As we know that corporate governance involves a set of relationship policies between a company and its “shareholders and stakeholders” which are made for the economic growth and to reach new markets. Therefore, in recent years a new change has been observed regarding the policies of Multinational Enterprises. These emerging market MNEs are improving their governance policies and making them more shareholder-friendly. This is done with an approach of seeking “global effectiveness” and “local responsiveness”.

MNEs are attempting to make their policies more shareholder-friendly as they want to access global markets and the country markets do not form large public equity systems. The formation of corporate governance policies depend on the capital markets and the main purpose of corporate governance is to protect the interests of “equity claimants in a company” and its stakeholders or “non shareholder constituencies”. So, the need to obtain large equity systems, access global markets, and to increase the net worth of their corporation drive the MNEs to improve their policies regarding shareholders.

Functions of the foreign exchange market What are the three major functions of the foreign exchange market? The foreign exchange market is most commonly called FOREX and it is a place where individuals are involved in the purchase and selling of foreign currency. This market spans the entire globe and serves three major functions as discussed in chapter 5 as well. The first important function of a foreign exchange market is to transfer currency from one country to another. This is done through the conversion of currency to the currency of the other country.

This process is carried out through exchange banks that are present all over the world. Second significant function of a foreign exchange market is to finance the importers and exporters. It provides credit to facilitate the process of trade from one country to another. It ensures the smooth flow of goods and trade among the nations. The last major function of this market is hedging exchange risks. To avoid the risks of fluctuations in foreign exchange, FOREX provides a forward contract that greatly helps those involved in foreign exchange.

Geography and the foreign exchange market

a. What is the geographical location of the foreign exchange market?

b. What are the two main types of trading systems for foreign exchange?

c. How are foreign exchange markets connected for trading activities? The FOREX market can be best described as an international market that spans the entire globe that knows no geographical boundaries. It is in fact a market that operates the entire day where exchanges are made every hour. Moreover, there are two main trading systems for foreign exchange market includes scalping and momentum.

In scalping, the purchase or selling takes place instantly after the trade is profitable. In this system, there is a scope to trade a lot and generate a large volume. The other trading system enables trading through news releases and the trending moves. It is supported by high volumes. However, all the foreign exchange markets are linked through telecommunications. The laying of submarine fibre optic cables has greatly facilitated the trading activities among the foreign exchange markets. It has connected the markets around the world and has made the process of foreign exchange swift and even more effective.

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