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5 Cards in this Set
- Front
- Back
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When is shareholder's wealth maximized?
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When the Marginal Return on Investment is equal to the Market Determined Cost of Capital
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What actions can shareholder's take to satisfy their time pattern for consumption?
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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.
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What does Fisher's separation principle imply about maximization of shareholder's wealth and consumption?
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Maximization of shareholder wealth is identical to maximizing the PV of lifetime consumption.
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What is the Fisher Separation Principle?
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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.
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Express the Fisher Separation Principle in terms of shareholder wealth and cash flows.
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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).
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