W00MT.6
6. TRUE/FALSE & EXPLAIN: The goal of a financial manager is to maximize
earnings. [6 pts]
FALSE. The goal of the financial manager is to increase the value of the company (increase shareholder wealth). Maximizing earnings is not the same thing. First of all, earnings are not cash flows, but are accounting constructs instead. You can't buy anything with earnings, buy you can buy things with cash flows. Second, which earnings should I maximize? I could maximize this year's earnings by not spending anything on future production, thus killing next year's earnings. How should I weight earnings in various years? Luckily NPV does all that for cash flows for us!