Goals of the Firm. You may have heard big business criticized for focusing on short-term performance at the expense of long-term results. Explain why a firm that strives to maximize stock price should be less subject to an overemphasis on short-term results than one that simply maximizes profits. A company that strives to maximize profits has several options. It can generate more sales. It can reduce cost of goods sold and improve gross margin. It can reduce operating costs and increase operating margin. It can also attempt to maximize profits and stock price in the short term by maximizing short term profits. One of the many ways to do so is to eliminate discretionary expenditures. These expenditures would include reducing or eliminating research and development, capital acquisitions, travel and entertainment, raises, and bonuses among other optional expenditures.
14. Goals of the Firm. We claim that the goal of the firm is to maximize current market value. Could the following action be consistent with that goal?
a. The firm adds a cost-of living adjustment to the pensions of its retired employees.
While including a cost of living adjustment to the pensions of the company's retirees is a humane act, it will not help to maximize current market value. The current market value is tied to the profits the company reports. Increasing payments to retirees increases expenses. This reduces profits, and lower profits tend to lower the current market value of the compa
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