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Is there a difference between corporate profit maximization and maximization of shareholder wealth?
Sure, profit maximization relates to profits *only* while shareholder wealth also involves total company equity, debt ratios and any of 15 other financial performance measure ratios. Management could focus on profit maximization over a longer period of time, say, 40 years (Toyota), while the shareholder would rather see stock values and corporate total value increase immediately (get in and get out) (90% of American manufacturers). If management focused on short-term profit maximization, say at the expense of long term sales revenues, then shareholder wealth (stock price) could actually decrease as a result of the loss of market share. The conflict of interests between shareholders and executives is an example of the "principle-agent problem."
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Wealth maximization is the appropriate objective of an enterprise. When the firm maximizes the stockholder's wealth, the individual stockholder can use this wealth to maximiz…e his individual utility. It means that by maximizing stockholder's wealth the firm is operating consistently towards maximizing stockholder's utility. A stockholder's current wealth in the firm is the product of the number of shares owned, multiplied with the current stock price per share. This objective helps in increasing the value of shares in the market. The share's market price serves as a performance index or report card of its progress. It also indicates how well management is doing on behalf of the shareholder. However, the maximization of the market price of the shares should be in the long run. Every financial decision should be based on cost-benefit analysis. If the benefit is more than the cost, the decision will help in maximizing the wealth. Implications of Wealth maximization. There is a rationale in applying wealth maximizing policy as an operating financial management policy. It serves the interests of suppliers of loaned capital, employees, management and society. Besides shareholders, there are short-term and long-term suppliers of funds who have financial interests in the concern. Short-term lenders are primarily interested in liquidity position so that they get their payments in time. The long-term lenders get a fixed rate of interest from the earnings and also have a priority over shareholders in return of their funds. Wealth maximization objective not only serves shareholder's interests by increasing the value of holdings but ensures security to lenders also. The economic interest of society is served if various resources are put to economical and efficient use. sowjanya
What is the concept of maximization of shareholder wealth Why is wealth maximization better than profit maximization Wealth maximization?
The concept of maximizing share holder wealth is a goal that encompasses everything that is expected out of a management. when would share holder wealth increase? Either b…y dividends or by increase in value of the shares. When can a company declare dividends or when would a company's share value increase? when its profits increase, its net sales and revenue increase etc. so indirectly by trying to achieve one goal we are attaining some other goals that are very important for a company's existence.
The two objectives of financial managment are (a) profit maximaization and (b) Wealth maximisation. Profit mxaimisation - maximisation of profits irrespective of co…nsiquences involved. It has few objections for examples 1. The term profit is vague, It does not clarify what exactly it mean it conveys different menaing to differnet people ie it may be short term profit or long term profit, it may be total profit or rate of profit 2. Ignores risk factor (higher the return higher will be the expected risk) 3. Ignres Time Value of Money (earlier the cash flows better it is) 4. Ignores social responsibility of business. Hence profit maximization is viewed as a limited objective ie essential but not sufficient. Wealth maximization - The objective of the company should be to maximise its value or wealth. Wealth or value of the company is represented by the market price of its common stock. this value is the function of two factors 1. Likely earnings per share of the company 2. Capitalization rate. Therefore Value of the firm = EPS / Capitalization rate. Hence wealth maximization is a better objective for business, since it represents both retrun and risk.
the difference between profit maximization and shareholders wealth maximization is that profit maximization is concern with profit that a company received based on inflow and …outflow within a period while shareholders wealth maximization is concern with dividend and capital gain that shareholder received on a return of his/her investment.
Wealth maximization: To stay invested and multiply your invested money. The term is used for long-term investors. Short-term investors work for profit maximization. They sell …their shares, as and when they get profit from the market.
Profit and Shareholder Maximization Shareholder wealth (more commonly referred to as shareholder �value�) is talking about the value of the compan…y generally expressed in the value of the stock. Profit maximization refers to how much dollar profit the company makes. It might seem like making as much profit as possible would yield the highest value for the stock but that is not always the case. When investors look at a company they not only look at dollar profit but also profit margins, return on capital and other indicators of efficiency. Say there are two companies doing the same thing. Company A had sales of $100 million and profit of $10 million. Company B had sales of $200 million and profit of $12 million. Wall Street could look at Company B and say they are less valuable because they clearly do no operate as efficiently as Company A. So even though Company B had more profit Company A will have more shareholder value. And to answer the next question, yes companies often decide to forgo marginal increases in profit if they feel the lower margins on the incremental gains in profit will have a negative impact share price. They actually increase shareholder value by NOT making more profit.
I'm going to bet some instructor made this point in class, and it's been a long time since I've been in class. But profit maximazation in my day was planning and making decisi…ons in the Long RUN best interests of the company. Wealth maximazation sounds more like maximizing the weal;th of the owners. But if the company is worth more than the owners' interests are correspondingly worth more and the owners are wealthier. But this wealth (money spent on new plant and equipment,) might be illiquid so, I guess you could say the company is richer but the owners are not $10,000.00 richer because a $10,000.00 in equipment is worth less if sold on the open market would be worth less, like a new car is worth less as soon as you drive it off the lot. Suggested by someonew who didn't go to the class either.
Shareholder wealth (more commonly referred to as shareholder value) is talking about the value of the company generally expressed in the value of the stock. Profit maximizatio…n refers to how much dollar profit the company makes.
Maximizing shareholder wealth and maximizing profit goes hand in hand. A firm maximizes shareholder wealth by investing in projects that will increase profits and the cash flo…ws of the firm, finding ways to prudently cut variable and fixed operating costs and creating products that will increase revenues. The firm's executives must also manage the company and its operations in a fiscally responsible manner in order to increase the profitability of the company. By taking these steps the firm therefore increases the shares of its stocks which increases shareholder wealth.
What are differences between the goals of profit maximization and the maximization of shareholder wealth?
Profit is the difference between the sales price and the costs. So profit maximization can be done by getting the maximum sales price and by spending the least amount of… money . In the market place , the sales price is determined by the market itself and the manufacturer does not have any control over it . The manufacturer can only vary the costs which mainly comprise of two elements - cost of goods sold and the efficiency of operation .Again the purchase price being determined by the market forces , the manufacturer will not have much control over it . In that case the profit maximization can be achieved only by working at the maximum operational efficiency. The objections to this theory are as follows . First and foremost the profit maximization assumes perfect competition in the marketplace , which for all practical purposes does not exist . Secondly as we saw earlier on that in the first phase of development the businesses are self financing with single owner. The only aim of the single owner is to enhance his individual wealth and personal power which is amply satisfied by the goal of profit maximization . But now the single owner is by and large been replaced by professional managers who are salaried employees , and equity shareholders . The business firm also has to deal with other interested parties which are the government , customers , employees and the society . In this scenario , profit maximization is not adequate objective . If a cigarette manufacturing firm , goes on concentrating on making profit without caring for the health of the society , it will soon find itself at the wrong end of the law and will have to pay heavy penalties to the society . If a chemical company does not want to install a water treatment plant and sends all the dirty water into the river nearby , it will , in the long run will have to pay severe damages . If the firm , tends to pay meager salaries to the employees in order to save money , the key employees may leave the company and then in the long run company will suffer . Also the term profit itself is somewhat ambiguous . Is it short term profit or long term profit ? Short term profits may endanger the long term survival . Is it before tax profit or after tax profit ? In the case it is profit after tax , the profit can be enhance by tax manipulation rather than better performance . Is it total operating profit or the percentage profit per share ? The bottomline can be made to look good by large scale golden handshakes and other sudden cost cutting measures which will lead to problems later on . Lastly the profit maximization does not consider the time value of money . The profit made today and the profit made after one year is treated to be the same . In an inflationary economy , a dollar today is much more valuable than one dollar one year after . II Wealth Maximization It means maximizing the net present value of a course of action. Net present value = Net present value of benefits- net present value of costs The financial action which generates positive net present value adds to the wealth of the firm and thus is desirable . If there are a number of mutually exclusive projects , then the project that gives the maximum net present value should be chosen. The objective of wealth maximization solves the two problems faced in profit maximization . It considers the time value of money and secondly it consider the risks involved in going for the various alternatives. The wealth maximization objective is consistent with maximizing the owners economic welfare .As for the shareholders the wealth created by the firm reflects in the market value of the share . Thus the fundamental objective of the financial manager is to maximize the market value of the shares of the company .
the difference between firm value maximization and shareholder wealth maximization?
Shareholders wealth can be maximized by maximizing Return on Equity, which is equal to Net Income divided by equity. The higher the net income the more the stock price will in…crease which will maximize their wealth.
Shareholder wealth maximization is achieving the highest possible wealth for a company's shareholders. This is done by achieving the highest possible value for the company… in the marketplace.
what is ultimate goal of firms.
A closely held corporation would be a shareholder wealth maximizer because owners are invested in their company. They may make decisions that increase their profits.
Maximizing shareholder wealth means that the company reduces re-investment of profits and increases the dividend payouts. Dividend payouts are the benefits paid out to sha…reholders after a financial period.
Yes, generally. Shareholders, or common equity, are only one component of a firm. A firm also has debt, and other hybrid components of its capital structure. Provided that the… profits are accruing to shareholders, then yes it is congruent.