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Why is shareholder wwealth maximization be a beter operating goal than profit maximization?
A firm's operating goal should be to maximize shareholder wealth as it is shareholders who are the owners of the firm. Profit maximizing however is more of a personal/management oriented type goal as it only benefits those running the company. This problem is known as the Agency issue, and it is directly related to the asymmetry of information problem that all firms suffer from.
Typically, higher ranking persons in a company, usually managers, know a lot more about the firms operations than do subordinates and common stock holders; this information may be exploited so that only profits and managements' personal pay packets are maximized, and shareholders who funded the firms operations by their purchase of ordinary equity benefit none as they experience no gain through increase in share value.
In order to overcome this issue, several things can be done. For example, monitoring techniques can be put in place to ensure management is acting in shareholder interest and not their own, or alternatively, management pay packets can be directly linked to the goal of maximizing shareholder wealth. If and when this goal is achieved and shareholders realize gains, management may be paid a cash bonus or an allotment of shares.
Put simply, shareholder wealth maximization should be the firms operating goal simply because they are financing the firms operations with their investing in the firm; to act against their interests is unethical, but still not unheard of.
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What condition might profit maximization not lead to shareholder wealth maximization?
Profit maximization may not lead to shareholder wealth maximization if the focus on short-term profits undermines long-term company sustainability. For instance, aggressive cost-cutting measures might boost immediate earnings but harm the company's reputation and customer relationships, leading to declining sales over time. Additionally, excessive risk-taking to maximize profits can result in significant losses, negatively impacting shareholder value. Thus, prioritizing long-term strategies and responsible management is essential for aligning profit motives with shareholder wealth.
Explain the rationale for selecting shareholders wealth maximizatio as the objective of the firm?
Explain the rationare for selecting shareholder wealth maximization as the objective of the firm.Include a consideration of profit maximization as an alternative goal
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.
Why is profit maximization not consistent with the objective of wealth maximization?
Profit maximization focuses on increasing a firm's earnings in the short term, often neglecting factors such as risk, sustainability, and long-term growth. In contrast, wealth maximization aims to enhance the overall value of the firm for its shareholders over the long term, considering aspects like cash flow, investment decisions, and market conditions. Consequently, an exclusive focus on immediate profits can lead to decisions that undermine long-term shareholder wealth, such as under-investment in innovation or neglecting social responsibilities. Ultimately, while profit maximization can contribute to wealth, it is not always aligned with the broader objective of maximizing shareholder value.
Under what conditions might profit maximization not lead to stock price maximization?
Under what conditions might profit maximization not lead to stock price maximization?"
Maximization of shareholder wealth as a goal is superior to profit maximization because?
it is operating cost
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
Which is more comprehensive objective profit maximization or shareholder wealth maximization?
If the company is public listed (trades in the stock market) their aim is shareholder wealth maximization whereas for a privately owned firm a profit maximization objective is appropriate.
What is the difference between profit maximization and wealth maximization?
Shareholder wealth (more commonly referred to as shareholder value) is talking about the value of the company generally expressed in the value of the stock. Profit maximization refers to how much dollar profit the company makes.
What condition might profit maximization not lead to shareholder wealth maximization?
Profit maximization may not lead to shareholder wealth maximization if the focus on short-term profits undermines long-term company sustainability. For instance, aggressive cost-cutting measures might boost immediate earnings but harm the company's reputation and customer relationships, leading to declining sales over time. Additionally, excessive risk-taking to maximize profits can result in significant losses, negatively impacting shareholder value. Thus, prioritizing long-term strategies and responsible management is essential for aligning profit motives with shareholder wealth.
Explain the rationale for selecting shareholders wealth maximizatio as the objective of the firm?
Explain the rationare for selecting shareholder wealth maximization as the objective of the firm.Include a consideration of profit maximization as an alternative goal
What is the primary objective of the firm?
The primary objective of a firm is to maximize profit and shareholder value while meeting the needs of its customers and stakeholders, and operating in a sustainable and ethical manner. This involves making strategic decisions that optimize resources and generate long-term growth and success.
What is maximazation of shareholders wealth and profit?
The maximization of a shareholder's profit is at a point where the value of share is maximum and dividend on the share paid by the company is also very high but only few successful companies give such profit maximization to their shareholders and the listings of such companies can be found out on activetrader-links.com for investment purposes.
What is the difference between stock price maximization and price maximization?
Profit maximization does not reflect (1) the timing of profits and (2) the riskiness of different operating plans. However, both of these factors are reflected in stock price 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.
Can there be difference between profit maximization and shareholders wealth maximization?
Profit maximization is short term as compare to share holder's wealth maximization, Managers should focus on Share holder's wealth maximization because its what they are hired for. also there are sevseal reasons such as.... 1) the share holders wealth is be considered.. 2)profit maximization doesnt say which type of profit it should maximize-short term or long term 3)profit maximization ignores the social values but only aims at earning maximum profit. 4)wealth maximization also considers improving the goodwill of the organization
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.
