Profit max vs shareholder max
In the case of a small business or partnership, that might be true e.
Given the nature of this form of financial management, companies mainly have a short-term perspective when it comes to earning profits and that is very much limited to the current financial year. In the short run, the risk factor can be neglected, but in the long-term, the entity cannot ignore the uncertainty.
It could not consider the social responsibility that is one of the most important objectives of many firms.
Similarities between profit maximization and wealth maximization
Reliability In the new business environment Profit maximisation is regarded as unrealistic, difficult, inappropriate and immoral. This conflict is called the agency problem. Under such approach maximization of profit is the sole objective of a business and the behavior of a firm is analyzed in terms of its profit maximization ability. Managers serve as agents of the shareholders. Total value is the sum of the value of all financial claims on the firm- including equity, debt, preferred stock and warrants. It is defined as the management of financial resources aimed at increasing the profit of the company. A Positive NPV creates wealth and therefore is desirable. Value maximization says that managers should make all decisions so as to increase the total long run market value of the firm. It also use discounting technique to find out the worth of a project. So, to measure the same, value of business is a function of two factors. It is the versatile goal of the company and highly recommended criterion for evaluating the performance of a business organisation. In the short run, the risk factor can be neglected, but in the long-term, the entity cannot ignore the uncertainty. Time value of money translates cash flow occurring at different periods Criticism on Wealth Maximization: It is a prescriptive idea. Principle- Fundamental objective of a firm is to maximize the market value of its shares.
It considers the time value of money. It ignores the risk and avoids the time value of money.
It is related to maximization of Earning per share of a firm. Total value is the sum of the value of all financial claims on the firm- including equity, debt, preferred stock and warrants.
Profit Maximization ignores the risk and uncertainty.
Profit maximization vs wealth maximization financial management pdf
Profit maximization is a short term objective of the firm while the long-term objective is Wealth Maximization. An obvious question that arises at this point is that how can we measure wealth. It aims to achieve and fulfill the social and economic obligations upon a business. Acts as a yardstick for computing the operational efficiency of the entity. It ignores time value of money i. It is because wealth creation needs a longer term; therefore financial management emphasizes on wealth maximization rather than profit maximization. These differences are substantial, as noted below: Planning duration. Profit is the parameter to measure the efficiency, survival and growth of a business. The modern approach focuses on maximization of wealth rather than profit. Wealth Maximization is based on the cash flows into the organization. A wealth-focused company would work on risk mitigation, so its risk of loss is reduced.
Profit Maximization is necessary for the survival and growth of the enterprise. It fails to consider the fluctuations in profits earned from year to year. But a short term horizon can fulfill objective of earning profit but may not help in creating wealth.
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