Question

1. Firms often involve themselves in projects that do not result directly in profits. For example, Apple donated $50 million to Stanford University hospitals and another $50 million to the African aid organization, a charity fighting against aids. Do these projects contradict the goal of maximization of shareholder wealth? Why or why not? ()

2. What is the relationship between financial decision-making and risk and return? Would all financial managers view risk-return trade-offs similarly?

Answer 1

Charitable projects by firms like Apple don't necessarily contradict the goal of maximizing shareholder wealth, as they can enhance reputation and increase profits in the long term. Financial decisions are always a balance between risk and return, and financial managers will view this trade-off uniquely based on various factors.

Step-by-step explanation:

Do Charitable Projects Contradict Shareholder Wealth Maximization?

Firms like Apple engage in projects that may not result in direct profits, such as donating significant sums to hospitals or aid organizations. While on the surface this might seem to contradict the goal of maximizing shareholder wealth, in the long term, such actions can enhance the company's reputation, lead to an improved brand image, and potentially increase sales. Furthermore, corporate social responsibility can attract customers and employees who value ethical business practices, eventually contributing to higher profits and shareholder value.

Relationship Between Financial Decision-Making, Risk, and Return

Financial decision-making is intrinsically linked to the concepts of risk and return. Every financial decision involves an assessment of the potential risk against the expected return. While all financial managers recognize this trade-off, they might view it differently based on their risk tolerance, investment horizon, and specific company goals.