Question

Explain two reasons why equity holders will not always choose projects that maximize firm value.

Answer 1

Equity holders always choose projects that maximize shareholder's value than Firm's value.

Equity Holders Invest or choose a project with a primary aim to own and maximize the overall Wealth of the company overall the life of the business, with an objective of maximizing shareholders value. Nevertheless, to attract additional investment, a company must demonstrate not only a long-term business plan, but immediate short-term success. It is the main goal of a company not only to satisfy its shareholders, but also other stakeholders. According to this view, a company has a fundamental duty to the larger community that made its existence possible. The difference between shareholders' value maximization and firm's value maximization reflects in the type of companies, Private or publicly traded companies.

Maximizing the firm's value primarily indicates company’s Revenue or Sales manifold to have more net profit in the interest of Investors. Maximizing firm's value revolve round the strategy or Objective of making more Profits mainly in the short run of the business and that the Shareholders do not hold onto to the Shares of the company for much longer. In most of the scenarios Shareholders of any Public Corporation Invest in the projects to have healthy share of profits over a short course of business Invest with a primary objective of Maximizing Profits, and can liquidate their share of Investment any time during the tenure of business.