What are the difference between the goals of profit maximization and maximization of shareholder wealth?

Answer 1

The diffence in laymen's terms is all within the focus. If one is maximizing shareholder value, they are simply placing focus on what can raise value in the "short term" (increase stock price). If one is maximizing company value, they are looking from a different point of view which is usually on what you can really sell the company for, intangibles such as reputation, products in the works, workplace, etc. A person would be looking towards the future "long-term" outlook with this perspective.

Answer 2

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 But now the single owner is by and large been replaced by professional managers who are salaried employees , and equity shareholders .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 .

Answer 3

Profit maximization will result in due to the Higher earning of the targeted Company compared to its market value.This results in when the targeted company is issued lesser share compared to the EPS ratio determined exchanged share, before the merger.

Answer 4

the difference between firm value maximization and shareholder wealth maximization?