Presented By :Bhanu Prakash .A(2VX13MBA02)

Wealth Maximization is superior then the profit maximization Discuss

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Meaning

<*> Profit Maximization :

Profit Maximization is the traditional and Narrow approach, in this process Companies undergo to Determine the best Output and price levels in order to maximize its return The company will usually adjust influential factors such as production costs, sale price, and output levels as a way of reaching its profit goal.

<*> Wealth Maximization :

The wealth maximization objective is almost universally accepted goal of a firm. According to this objective, the managers should take decisions that maximize the shareholders' wealth. In other words, it is to make the shareholders as rich as possible. Shareholders' wealth is maximized when a decision generates net present value.

Wealth Maximization Is superior Then Profit Maximization

Firstly, the wealth maximization is based on cash flows and not profits. Unlike the profits, cash flows are exact and definite and therefore avoid any ambiguity associated with accounting profits.

Secondly, profit maximization presents a shorter term view as compared to wealth maximization. Short term profit maximization can be achieved by the managers at the cost of long term sustainability of the business.

Thirdly, wealth maximization considers the time value of money. It is important as we all know that a dollar today and a dollar one year latter do not have the same value. In wealth maximization, the future cash flows are discounted at an appropriate discounted rate to represent their present value.

Fourthly, the wealth maximization criterion considers the risk and uncertainty factor while considering the discounting rate. The discounting rate reflects both time and risk. Higher the uncertainty, the discounting rate is higher and vice-versa.

Wealth Maximization Is superior Then Profit Maximization (Cont…)

Wealth Maximization is superior to the profit maximization because the main of the business concern under this concept to improve the value or wealth of the shareholder

Wealth Maximization considers the comparison of the value to cost associated with the business concern. Total value detected from the total cost incurred the business operation.

Wealth maximization consider both time and risk of the business. Wealth Maximization provide s efficient allocation of

resource It ensures the economic interest of the society