Business Finance Essay Example | Topics and Well Written Essays - 3000 words

Business Finance - Essay Example The maximization act in general is the one being criticized as the managers tend to be carried away by the mere feeling to satisfice and not really come up with means of maximizing or optimizing according the theories of finance. This means that the mangers go for solutions which they regard as satisfactory yet they need to seek the best solutions that are possible respecting the existing constraints. Considering the structure of most modern firms, it is almost impossible to single out the mangers true motives. Modern firms are mostly organized to operate as a corporation where shareholders happen to be the legal owners of such firms and the managers have been given the mandate to act on behalf of their shareholders. This happens if the manager is out to merely satisfy the firm’s stockholders while at the same time pursing other goals of his or her own interests that are in no manner related to attempts to try and maximize the firm’s value. A good example is charitable organizations where it is hard to tell the firm’s support makes an integral part of its value maximization in long terms. In addition, considering a case where the size of the firm in continuously increasing yet the profits are not; this can be attributed to the decision of the manager to have his motivation as being to expand the size of the business through increasing its prestige association with other lager firms or an effort to make the firm more recognized on the market place. It becomes very hard to come up with definite answers to situations like the ones mentioned above resulting to some of the financial theorists to come up with theories on firm behavior. The theories have come up with different situation in relation to the managers and maximization of the ownership wealth. They include; A firm manager may primarily try to maximize the growth or size of the firm and not its current value, the firm’s manager may try to maximize their own welfare or utility and in other cases a firm being considered as a collection of different individuals who have divergent goals rather than one common goal (Williamson 2000, p. 73) As the financial theories regarding firm try to increase the understanding on how firms behave, they don’t necessarily provide the most desired solution especially when it comes to wealth maximization considering the dynamics in the structures of different firms. However, they serve as basis for better understanding and interpretation of different behaviors witnessed in firms. Financial theorists have argued that it is the intense market competition for services and goods that usually force the firm managers to make decisions regarding value and wealth maximization. If a firm fails to come up with the right decision regarding alternatives that are most efficient which imply the need to go for maximum costs for every output level, considering the commodity market price being produced by the firm, other firms may end up o utcompeting the firm thus pushing it out of existence. Competition also impacts the firm operations through the capital market. In such as case, stockholders are mainly interested in their stocks returns as well as the prices of their stock which are determined by the value of the firm, that is the expected profits current value that has been discounted. This forces the managers to maximize the profits of the