Assignment 2 Carolina

Carolina Gomez Montoya
Assignment:
Read chapter 1, 11th edition (see the “reading assignments” file if you are using another
edition) and answer the following questions:
1. Explain the assumptions and objectives of the shareholder wealth
maximization model and stakeholder capitalism model.
2. Define the following terms: a) corporate governance, b) the market for
corporate control, c) agency theory
3. What should be the primary operational goal of an MNE?
4. Is International Finance only relevant for multinational corporations?
Solution:
1.
 Shareholder Wealth Maximization Model
Assumptions:
-As a universal truth that the stock market is efficient.
-The share price is always correct because it captures all the expectations of return and risk as
perceived by investors.
Objectives:
-The firm should strive to maximize the return to shareholders-those individual owning euity
shares in the firm, as measured by the sum of capital gains and dividends, for a given level of
risk.
-The firm management should always minimize the risk to shareholders for a given rate of
return.
 Stakeholder capitalism model

Objectives:
-The firm should always attempt to maximize corporate wealth.
-The firms also should treat shareholders on apar with the other corporate stakeholders, such as
management, labor, the local community, suppliers, creditors, and even the government.
-The goal is to earn as much as possible in the long-term run, but to retain enough to increase
the corporate wealth for the benefit of all.
Assumptions:
-This model does not assume that equity markets are either efficient or inefficient.
-The model assumes that long-term “loyal” shareholders should influence corporate strategy,
not the transient portfolio investor.
-The CWM model assumes that total risk, that is, operating and financial risk, does count. It is a
specific corporate objective to generate growing earnings and dividends over the long run with
as much certainty as possible, given the firm’s mission statement and goals.
2.
Corporate governance: Is the relationship among stakeholders used to determine and control
the strategic direction and performance of an organization is termed corporate governance.
Corporate governance is, in essence, the method in which order, and process is stablished to
ensure that decisions are made, and interest represented, properly, for all stakeholders.
The market for corporate control is

the takeover market where poorly
performing firms (from the
perspective of shareholders) are
acquired by businessmen who
think they can make a
profit by restructuring the firm.
The process usually involves the
dismissal of the management.
Therefore the
threat of takeover puts pressure on
management to perform more
efficiently and try to make
decisions that benefit
shareholders.
Therefore the
shareholders.
Therefore the
shareholders.
The market for corporate control : is the takeover market where weakly performing firms (from
the point of view of the shareholders) are acquired by businessmen who think they can make a
profit by reorganization the firm. The process usually involves the dismissal of the management.
Then, the threat of takeover puts pressure on management to perform more efficiently and try
to take decisions that benefit shareholders.
The agency theory : is the study of how shareholders can motivate management to accept the
prescriptions of the SWM model. It studies the principal-agent problem, the difficulties involved
in encouraging the “agent” to act out in the main interest rather than in his own ones.
3. The primary operational goal of the MNE is to maximize consolidated profits, after-tax. Consolidated
profits are the profits of all the individual units of the firm originating in many different currencies
expressed in the currency of the parent company.
4. Is not because it is an important tool to find the exchange rates, compare inflation rates, get an idea
about investing in international debt securities, ascertain the economic status of other countries and
judge the foreign markets, it helps to have a global perspective and assumptiosn regarding MNEs,
monetary interactions. It is good to companies, to firms, to corporations to increase and access to
this world and become multinational.

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Carolina Gomez Montoya

 Stakeholder capitalism model

-The firm should always attempt to maximize corporate wealth.

The market for corporate control is

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