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5 Cards in this Set

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When is shareholder's wealth maximized?
When the Marginal Return on Investment is equal to the Market Determined Cost of Capital
What actions can shareholder's take to satisfy their time pattern for consumption?
They can take the optimal production decision and borrow or lend along the capital market line; i.e. they can take cash payouts from the firm and use them for current or future consumption according their individual desires.
What does Fisher's separation principle imply about maximization of shareholder's wealth and consumption?
Maximization of shareholder wealth is identical to maximizing the PV of lifetime consumption.
What is the Fisher Separation Principle?
Allows the separation of individual utility preferences from the investment decision. Managers will take projects until marginal rate of return equals the market determined discount rate.
Express the Fisher Separation Principle in terms of shareholder wealth and cash flows.
Shareholders' wealth is seen to be the present value of cash flows discounted at the opportunity cost of capital (the market determined rate,i.e. capital market line).