S

Profit maximization VS Wealth

maximization -The conflict

Broadly, there are two alternative objectives that a

business firm can pursue

Profit Maximization

Wealth Maximization

Profit Maximization

It is a term which denotes the maximum profit to be earned by an organization in a given period of time.

The profit maximization goal implies that the Investment, Financing and Dividend decisions of the enterprise should be oriented to profit maximization.

Merits of Profit Maximization

Best Criterion on decision making.

Efficient allocation of resources.

Optimum utilization.

Drawbacks of Profit Maximization

It ignores time value of money.

It is vague conceptually.

It ignores the risk factor.

It may tempt to make such decisions which may in the long run prove disastrous.

Its emphasis is generally on Short run projects.

In the new business environment Profit maximization is regarded as unrealistic, difficult, inappropriate and immoral.

Wealth Maximization

Fundamental objective of wealth maximization is to maximize the market value of the firm’s shares.

Maximizes the net present value of a course of action to the shareholders.

Accounts for the timing and risk of expected benefits.

Benefits are measured in terms of cash flows.

Merits of Wealth Maximization

The wealth maximization objective takes care of the:

Shareholder’s interest

lender’s or creditor’s interest

Worker’s or employees’ interest

It also ensures fair return to the shareholders, building up reserves for growth and expansion, ensuring financial discipline in the management.

Merits of Wealth Maximization

It focuses on the long term.

It takes into account the time value of money.

It considers risk.

It maintains market price of the shares of the organization.

It recognizes the value of regular dividend payments.

Conflict

Profit Maximization

Its main objective is to earn large amount of profits.

It emphasizes short term

It ignores time value of money.

It ignores risk and uncertainty.

It ignores timimg of return

Wealth Maximization

Its main objective is to achieve highest market value of common stock.

It emphasizes long term

It considers time value of money.

It recognizes risk and uncertainty.

It recognizes the timings of return.

Thank you