Studying finance and economics

Watch this thread
captainchalk
Badges: 0
Rep:
? You'll earn badges for being active around the site. Rep gems come when your posts are rated by other community members.
#1
Report Thread starter 8 years ago
#1
Taking two core finance and economics courses this semester. One says that the firm's fundamental goal is to maximise profits. The other says the goal should be to maximise firm value.

I am so confused.
0
reply
js93
Badges: 6
Rep:
? You'll earn badges for being active around the site. Rep gems come when your posts are rated by other community members.
#2
Report 8 years ago
#2
They are just theoretical foundations. In reality a firm has a lot more goals than just maximising it's value or its profits.

In economics we assume that a rational firm acts to maximise profits because normally we don't look too closely at the value of a firm, the firm is used more to study production.

In finance, production of a firm is less important. It is the value of a firm that is maximised under the assumptions. This isn't all that different to maximising profits. As profits are often reinvested in a firm which raises is value.
0
reply
ddrrzzeerr
Badges: 17
? You'll earn badges for being active around the site. Rep gems come when your posts are rated by other community members.
#3
Report 8 years ago
#3
(Original post by captainchalk)
Taking two core finance and economics courses this semester. One says that the firm's fundamental goal is to maximise profits. The other says the goal should be to maximise firm value.

I am so confused.
These two objectives are consistent with each other. It is just that the concept of profit in economics is different to profit which is calculated through accounting conventions in finance. Once you peel away the accounting, which is not of interest to economists, so you are comparing like for like, the statements are equivalent. The accounting isn't really of interest in finance either but it is less easily avoided than in economics.

Maximising firm value is maximising the present value of the cash flows of the firm produces. These cash flows are really what economists mean when they say profit. It is what is actually going into the pockets of investors.

Many economic models are static, meaning everything happens in a single period. Which is why economists say "maximise profits" rather than "maximise the discounted value of profits".

In dynamic economic models profits are discounted the same way they are in finance so again what an investor is really interested in when valuing in the firm is what an economist means when he says "profit".

Put simply, the value of a firm is the sum of its discounted profits and therefore the maximisation problems are equivalent.
0
reply
X

Quick Reply

Attached files
Write a reply...
Reply
new posts
Back
to top
Latest

How confident are you that you'll achieve the grades you need to get into your firm uni?

I think I've exceeded the grades for my university offer (19)
17.92%
I think I've met the grades for my university offer (28)
26.42%
I think I've missed the grades for my university offer (55)
51.89%
Something else (tell us in the thread) (4)
3.77%

Watched Threads

View All