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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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Answer Profit maximization is the ONLY appropriate goal for a business. Even under a so-called "social responsibility" regime, a business only engages in such s…chemes because it thinks it can increase profits by doing so.
Uncertainity and timing are some of the problems
A goal of firm isn't always profit driven, it can be any cause. Profit maximization is revenue driven, making more money is it focus.
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.
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.
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.
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.
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
maximizing the difference between total revenue and total cost
According to textbook economics, this is true. High profits make happy shareholders. The more monopolistic a company can behave, the higher profits will be. A good example wou…ld be Microsoft. This company had the "honour" of having to pay the highest fine in the history of the Antitrust commission in Brussels, at least at that time. Remember that Neelie Kroes also fined Intel with a 1.45 billion USD. Another form of illegal keeping prices high is via cartels.. Or maybe not? If company A makes profits, then it is absolutely sure that direct competitors will enter the market. In that case, profits would decrease. In order to prevent this, company A produces as much and as efficiently as possible so profits are slightly above 0. Now, it still has first mover advantage, can still pay its bills and invest but most importantly: nobody will enter. Being green and socially responsible are new goals. At first they might seem to lower profits because of the higher costs involved. However, a green and responsible image can attract new customers because of growing environmental awareness. On top of that, green initiatives are being subsidized by government. Study Triodos Bank, this green bank is doing very well despite the crisis! Their website is www.triodos.com Please let me know whether my answer was helpful!
Why is the wealth maximization rather than the profit maximization preferred goal to the financial managers of a business firm?
The two objectives of financial managment are (a) profit maximaization and (b) Wealth maximisation. Profit mxaimisation - maximisation of profits irrespective of consiquences… 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.
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.
Where the marginal benefits equal marginal costs.
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.
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
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.
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!