Which of the following statements is not correct regarding earnings per share (EPS) maximization as the primary goal of the firm?
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A. B. C. D.D
The correct answer is D. EPS maximization is not concerned with maximizing net income.
Explanation: Earnings per share (EPS) is a financial ratio that measures the amount of profit that a company has earned per share of its outstanding common stock. It is calculated by dividing the net income of the company by the number of outstanding shares of common stock.
EPS maximization refers to the objective of maximizing the earnings per share of the company's common stock. This goal is often pursued by managers of publicly-traded companies since investors are typically willing to pay a higher price for a company's shares when they believe the company's earnings per share will increase in the future.
Now let's look at each answer option:
A. EPS maximization ignores the firm's risk level This statement is correct. EPS maximization does not consider the risk associated with achieving higher earnings per share. For example, a company may be able to increase its EPS by taking on more debt or investing in riskier projects, but these actions could also increase the company's overall risk.
B. EPS maximization does not specify the timing or duration of expected EPS This statement is also correct. EPS maximization does not provide information on when or for how long a company expects to achieve higher earnings per share. It simply aims to increase the earnings per share of the company's common stock.
C. EPS maximization naturally requires all earnings to be retained This statement is not correct. EPS maximization does not necessarily require a company to retain all of its earnings. In fact, a company can increase its EPS by either retaining earnings or by reducing the number of outstanding shares of common stock through share repurchases.
D. EPS maximization is concerned with maximizing net income This statement is not correct. EPS maximization is focused on maximizing the earnings per share of the company's common stock, not the overall net income of the company. Maximizing net income may involve taking actions that do not necessarily increase the earnings per share of the common stock, such as investing in research and development or expanding the company's operations.
In summary, EPS maximization is the goal of maximizing the earnings per share of the company's common stock, but it does not consider the company's risk level, does not specify the timing or duration of expected EPS, and does not necessarily require all earnings to be retained. Additionally, it is not concerned with maximizing net income.