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Why is profit maximization not an appropriate goal of the firm?
A firm cannot survive with mere profit maximization, but must increase long-term security through investment and meeting shareholder expectations. This will increase their productive capacity for the furture as well as encourage the risky capital investment of the shareholders.
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It is fairly easy to make short-term profits at the expense of long-term value creation. Milk the company. Some examples: - Make lots of short term sales by lowering prices,… thus driving down overall industry profitability which will lower long-term profit. -Create a lower quality product then the ones that have built up the value of your company brand. People will buy the new product seeking quality and be disappointed. This devalues the brand and brand value may be critical to long-term success. -Cut out the product development department. This spikes profit and destroys the future. Same with marketing. -Sell off assets for big one-time gains. -Don't invest in people. Push them hard. Don't reward them. You will save money, make big profits, and then collapse.
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
Why maximizing shareholers' wealth is always the goal of a firm instead of maximizing profits of the firm's?
The foundation of a firm is the investment, the wealth of its promoters and more importantly the share holders. Share holders have invested their money in the firm basing on t…he confidence they have on the firm and believing that their investment will be safe and will fetch good reasons. Once their trust is shaken, it will ruin the firm. On account of all these, the primary goal of a firm is to maximise the share holders' wealth.
Uncertainity and timing are some of the problems
Shareholder wealth maximization is considered to be a more appropriate goal for the firm than profit maximization because?
Shareholder wealth maximization is considered to be a more appropriate goal for the firm than profit maximization
What are some of the problems involved with the use of profit maximization as the goal of the firm How does the goal of maximization of shareholder wealth deal with those problems?
Problems involved with the use of profit maximization as the goal of the firm due to numbers of reasons. 1 It ignore the timing of return. 2 It ignores the timing of returns. …3 It ignores the risk.
Profit determine if you stay in business at all as no business can operate at a loss! Maximization of these profits has key essentials for any business here is but a few as …there are many vast reason and applies as following; Reduced wasted costs - if output volume or the costs of operations very low provides a measure of optimal management performance and reduced waste. In a large firm means higher corporate tax rates or payments. Increased Capital for re-investments- if mass profits exist then more money can be reapplied into the business for either market growth or new product development without loans or debts. In a large firm means loss of borrowing needs to an extent! Investment rating performance- its high profit margins attracts investors as another source of sustainability and market growth garnering more resources for revenues. In a larger firm means consistent demands for higher dividend vs capital expansion or operations. Banked assets for investments and future downturns- like a savings account per an individual many wish to garner a safety level of assets to shelter against downturn markets, meet future obligations such as employee retirements and even lawsuits. Yes the more holdings a large firm gets the more the lawsuits and interest rates. Buying power and expense management- most businesses like to build an operations accounts that will cover operations for a year to even up to five years. This buying power enables businesses to negotiate pay now for bulk services at set at current prices to dodge inflation or rising costs. A large corporate firm practicing this may get consumer flack for increasing prices! LARGE FIRMS Avoid them as these profits mean: High Taxes as Corporate Tax Rates are very high and Garner them as Targets for Lawsuits, Wage Disputes, Hostile Take-overs and more attacks for those earnings - and void real performance of future works as sheltered fund operations enacts a safe have mentality and reduces aggressive market psychology withing a large corporate firm! Also, outside forces such as consumer ideas of market price as large volumes of holdings also increase any businesses security an added cost - the more the money the more the envy and it's assaults apply for a business.........most large corporate firms try to avoid mass holdings as in the past even to today many large global companies have had foreign kidnappings/ransoms and more threats on securing smart operational strategies this may include lower cost smaller operations that may see more costs in loss of life vs... income earned in foreign markets. The Reasons is Economic Management Responsibility --To a small business owner it's about maximum profits for the end of a career or work establishment to a large firm it's about managing it's economic fluctuations as to stay operational for terms longer than a single human life by not so large in holdings it loses it's competitive edge in a market or enacted as a target loss of standing in a market! There for a large firm establishes it's self as a solid economic resource in the labor market with yes turn overs in labor and as an industry establishment bases or foundation for any given economic sector forced to manage goods or even aid in the regulations of resource management. At a large firm level flexibility is a different matter than a small business that sees it in maximum profits it provides a different playing field large firms is more at an economic responsibility level with profit motivation. Large firms holdings economically can impact interest rates in the economy and must set it's responsibilities accordingly if this makes any sense the more money held also means to some degree less stimulated growth to other sectors of industry - a just in time use of assets permits more diverse products and opportunities in a region (eliminating the one company town that may impact a region/city or community when it's resources dry up examples closed mining towns). Only a few large firms regulate themselves in a market to some degree other don't and the effects vary either internal its demise or like a sinking ship takes many along with it! As there is a different level or count of loss the large the volume hence reason government imposes high corporate taxes apply to help regulate loss and enable diversification!
Profit Maximization is an interesting and rather deep issue in Economics. Please understand that this question can be answered from various approach and interpretation. There …are other disciplines like Business and Management which offers a slightly different answer.For example, if you are a Finance student, you might use the term to maximize shareholder value. ( which can be different from this goal ). From my understanding, profit maximization alone cannot be an appropriate goal for a firm. When I teach my students, I often ask them, if each of you start a company today, will the reason to do so, just to maximize profit ?. Although many firms do aim to maximize profit in their existence, not all do so. When we say maximize profit, this means to get the most profit in the firm's existence. And there are other firms that don't. Other goals of the firm can be expansion or growth, where they focus on establishing more branches or growing larger, while other firms focus on sales maximization, where they focus on selling more. There are also other firms that put the environment or social issues as their goal. ( although this can be argued if it's a marketing ploy ). Apart from these different goals of firms, we need to understand that different firms have different goals. A small grocery shop will have a different goal than a multinational company. And a different environment can also affect the goals of the company. If the firms operates in a monopolistic environment, then profit maximization is possible, as it's the only firm. If the firm operates in a perfectly competitive environment, the goal of profit maximization is not possible, as profit can be influenced by new firms who enter the environment and old firms who exit it.
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.
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.
Some firms want to get maxim profit because they are greedy. Other firms may accept less than maximum profit due to balancing profit against other values such as: concern fo…r their employees, desire to follow the law, making ethical and moral choices, having minimal impact on the environment, and wanting to avoid hurting others. Pure profit maximization is pure greed.
There is nothing wrong, if it is one of the goals. If that happens to be the only goal, employee's morale will get affected. Quality may deteriorate. Innovations can take a ba…ck seat.
maximizing the difference between total revenue and total cost
What is difference between profit maximization and wealth maximization. which one of them is more appropriate goal of financial management and why?
Profit Maximization It means the rupee income of firms. Firms may function in the market economy or government economy. In market eco…nomy prices are determined in competitive markets and those are expected to produce goods and services desired by the society. In accounting sense it tends to become a long-term objective, which measure not only the success of the products but also development of the market for it. The word profit implies a comparison of the operation of the business between two specific dates, which are usually separated by an interval of one year. In order to optimize those corporate sources of wealth on which national prosperity depends, the basic financial objectives of the companies is to maximize within socially acceptable limits, profit from the funds use of funds employed to them. Wealth Maximization Wealth Maximization is also known as Value Maximization or Net Present Worth Maximization. The company, which has profit Maximization as its objective, may adopt the policies fielding exorbitant profit in the short run which are unhealthy for the growth survival and overall interest of the business. Hence it is commonly agreed that the objective of the firm should be to maximize its value or health of the firm. Features of Wealth Maximization: 8 It measures the benefit in terms of cash flow and avoids the ambiguity associated with the accounting profits. 8 It consider both quality and quantity dimensions of benefits. 8 It also incorporates the time value of money.
Sometimes the managers of the firm may be more interested in their own gain, for example if the firm will maximise profits at 1000 units, anything produced after that has a hi…gher Marginal cost than it does Marginal Revenue, profit wil start to decline. however managers may still aim to sell more than the 1000 if they are receiving a bonus for the amount of sales, they may choose to maximise sales rather than profits
Where the marginal benefits equal marginal costs.
When a firm maximizes its profit, it automatically maximizes its shareholder value. When both profit and the shareholder value increase, in course of time, the overall firm va…lue will increase. All these would undoubtely increase its share price in the market as well.