In what ways is wealth maximization objective superior to the profit maximization objective?

Answer 1

Wealth maximation aims in maximising Shareholders wealth, employees wealth, profiting the external and internal parties of the firm, vendors, vendees, customers, investors, employers and all the parties interested in the benefit of the company.

Wealth maximation results in increased goodwill, branding and reputation of the company.

Where as profit maximation only deals with increased profits. Wealth maximation is a wider concept

Answer 2

requently, maximization of profits is regarded as the proper objective of the firm, but it is not as inclusive a goal as that of maximizing stockholder wealth. For one thing, total profits are not as important as earnings per stock. A firm could always raise total profits by issuing stock and using the proceeds to invest in Treasury bills. Even maximization of earnings per stock, however, is not a fully appropriate objective, partly because it does not specify the timing or duration of expected returns. Is the investment project that will produce a $100,000 return 5 years from now more valuable than the project that will produce annual returns of $15,000 in each of the next 5 years? An answer to this question depends upon the time value of money. Few existing stockholders would think favorably of a project that promised its first return in 100 years, no matter how large this return. We must take into account the time pattern of returns in our analysis. Another shortcoming of the objective of maximizing earnings per stock is that it does not consider the risk or uncertainty of the prospective earnings stream. Some investment projects are far more risky than others. As a result, the prospective stream of earnings per stock would be more uncertain if these projects were undertaken. In addition, a company will be more or less risky depending upon the amount of debt in relation to equity in its capital structure. This financial risk is another uncertainty in the minds of investors when they judge the firm in the marketplace. Finally, an earnings per stock objective does not take into account any dividend the company might pay. For the reasons given, an objective of maximizing earnings per stock may not be the same as maximizing market price per stock. The market price of a firm's stock represents the value that market participants place on the firm

from: abhinav srivastava

amity university, noida

Answer 3

Everyone knows that profit is the life blood of every organization. Profit maximization is the primary or main objective of organizations, but under the method of profit maximization the purpose is to increase sales and profit. Less importance is given for consumer interest. Any queries against product or services is not considered and importance will be less per this method. So at the beginning organizations may be successful in its goal of earning high profits, but the organization will definitely suffer loss in future. Wealth maximizing means increasing fame, goodwill or reputations by providing importance to consumer preferences and wealth of society. By providing importance to consumer preferences organizations get queries, the need of changes in products that are innovative activities, after sale services, etc. With this important information product or service quality can be increased. Though sales will increase and demand will increase; goodwill also increases. By this, more of the shareholders, employees will be attracted towards the organization. After that, the lifetime of the company increases also. Organization's like NIKE and REEBOK are examples that are following the wealth maximization method. Wealth maximization is the better goal than profit maximization.

Answer 4

Asset creation through wealth maximization is always welcome since the same generates employment for the masses as a whole,whereas profit maximization is beneficial for the employer/proprietor alone.

Answer 5

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.

Answer 6

yes