Profit maximization and value of the firm are two concepts which are:
A)Unrelated because cash flow is only one component of the firm's value
B)Closely linked because profit maximization translates into maximizing the firm's value
C)Unrelated because Net Present Value is used to assess the value of the firm
D)Closely linked because the value of a firm is the sum of its free cash flows in each year discounted at the firm's interest rate

Question

Quizplus · Accepted Answer

Profit maximization is closely linked to maximizing the firm's value because the more profit a firm earns, the higher its cash flows become, which translates into a higher valuation of the firm. In this way, maximizing profits can ultimately lead to maximizing the value of the firm.

Profit Maximization and Value of the Firm Are Two Concepts