Profit Maximization avoids time value of money, but Wealth Maximization recognises it. Profit Maximization is necessary for the survival and growth of the enterprise. Conversely, Wealth Maximization accelerates the growth rate of the enterprise and aims at attaining the maximum market share of the economy.
Does profit maximization always lead to the shareholders wealth maximization?
Answer: In summary, the wealth maximization as an objective to financial management and other business decisions enables the shareholders to achieve their objectives and therefore is superior to profit maximization.
Why is profit maximization overruled by wealth maximization?
Wealth maximization is superior to the profit maximization because the main aim of the business concern under this concept is to improve the value or wealth of the shareholders. Wealth maximization considers the comparison of the value to cost associated with the business concern.
Which is better, profit maximization or wealth maximization?
Again, the profit maximization objective does not factor in time value of money considerations. Therefore wealth maximization is superior because it is a long term objective and considers the time value of money by discounting cash flows to the present time.
Are there any drawbacks to profit maximization?
Some of the drawbacks of profit maximizations are In Profit Maximization, profit is not defined precisely or correctly. It creates some unnecessary opinion regarding earning habits of the business concern. For example, profit may be long term or short term. It may be total profit or rate of profit.
Why is profitability maximisation important for a finance manager?
Since the finance manager is responsible for the efficient utilisation of capital, it is plausible to pursue profitability maximisation as the operational standard to test the effectiveness of financial decisions. However, profit maximisation objective suffers from several drawbacks rendering it an ineffective decisional criterion.
Why is profit maximization considered a moral imperative?
Profit maximization is thus a moral imperative for corporate executives. The interests of groups other than the shareholders should thus only be given weight to the extent that pursuing these interests also benefits the shareholders.
