Existence of Corporates and Financial Leverage

Topic 

Existence of Corporates and Financial Leverage

Instructions 

1. Distinguish how maximizing the value of the corporation differs from maximizing shareholder interests.
2. Explain how leverage can improve returns to the shareholders.
3. Describe the impact of corporate taxes on the weighted average cost of capital.

Answer Preview 

The main aim of the existence of corporates is maximizing shareholders’ profit. However, during the process there arises agency conflicts since maximizing the value of the corporation is the manager’s goal while maximizing stockholder interest is the shareholder’s interest. The difference between the two words can be deduced from who benefits in their actualization. If corporate succeeds in maximizing firm value, the managers and other staff will benefit since they will have higher pay. On the other hand, if stockholder interests are maximized, stockholders will benefit by getting high dividends.

Word Count: 250