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Essay / Research Paper Abstract
The Fisher Separation This 5 page paper is written in three parts. The first part looks at what the Fisher separation is, what it means for investment decisions and how it separates investor preferences and investment decisions. The theorem is explained. The second part of the paper uses the theorem to justify the use of NPV as an investment assessment method and the last part of the paper considers why it does not work in real world applications. The bibliography cites 3 sources. TEfishersep.rtf
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5 pages (~225 words per page)
File: TS14_TEfishersep.rtf
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forward a theorem that argues regardless of the personal preferences of investors a firm will undertake a strategy to maximize its present value. The theory puts forward idea that it
is possible to separate the preferences of the shareholders and investment decisions (Mathiesen, 2009). Under this model, as long at the owners of a firm are rational, it is
argued that whatever their preferences they will agree on a profit maximizing strategy. To explain this we can look at an application of this to a hypothetical situation. A firm
has two owners with different outlooks; one has a short term approach while the other has a long term attitude. The ideal scenario for the short term investor would prefer
the current investment levels to be cut in order to facilitate a maximization of consumption that can be undertaken, in contrast the investor with the long term attitude would like
to maximize the future returns that investment may create and benefit future consumption (Mathiesen, 2009). This can be represented in a graphical format where it is shown that the
investor with the short term attitude will prefer to under invest and the long term investor will have a preference for over investment (Mathiesen, 2009). Figure 1 Now we
need to look at what will happen when there are capital market operations and where the investors are able to access capital to compliment the investments that they want to
make by lending or borrowing, where this occurs there is the ability to see why there is the ability for the preferences to have an investment preference that coincides (Mathiesen,
2009). Using another graph it can be seen that the capital market is able to provide opportunities that will enhance the opportunities faced by both types of investor. As
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