What is difference between profit maximization and wealth maximization. which one of them is more appropriate goal of financial management and why?

Answer 1

Profit Maximization

It means the rupee income of firms. Firms may function in the market economy or government economy. In market economy 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.