According to the firm's owner wealth maximization goal, the firm should accept projects up to the point where the marginal return on its investment is equal to its weighted marginal cost of capital.

Question

Quizplus · Accepted Answer

This statement is consistent with the principle of maximizing shareholder wealth, which suggests that a firm should invest in any project that provides a return higher than the cost of capital used to fund it, as long as there are no other constraints or negative consequences. By choosing projects with a positive net present value, the firm can create value for its owners and increase their wealth over time. The marginal return on investment refers to the additional cash flows generated by a project, while the weighted marginal cost of capital represents the opportunity cost of using funds from different sources, weighted by their respective proportions in the capital structure. By equating these two variables, the firm can determine the optimal level of investment and avoid underinvesting or overinvesting. However, this assumes that the firm is acting in a perfectly efficient market and has complete information about the costs and benefits of each project, which may not always hold in practice.

According to the Firm's Owner Wealth Maximization Goal, the Firm