Typical goals of the firm include (1) stockholder wealth maximization; (2) profit maximization; (3) managerial reward maximization; (4) behavioral goals;

and (5) social responsibility. Modern managerial finance theory operates on the assumption that the primary goal of the firm is to maximize the wealth of its stockholders, which translates into maximizing the price of the firm s common stock. The other goals mentioned above also influence a firm s policy but are less important than stock price maximization. Note that the traditional goal frequently stressed by economists profit maximization is not sufficient for most firms today. The focus on wealth maximization continues in the new millennium. Two important trends the globalization of business and the increased use of information technology are providing exciting challenges in terms of increased profitability and new risks.

Profit maximization is basically a single-period or, at the most, a short-term goal. It is usually interpreted to mean the maximization of profits within a given period of time. A firm may maximize its short-term profits at the expense of its long-term profitability and still realize this goal. In contrast, stockholder wealth maximization is a long-term goal, since stockholders are interested in future as well as present profits. Wealth maximization is generally preferred because it considers: (1) wealth for the long term; (2) risk or uncertainty; (3) the timing of returns; and (4) the stockholders¶ return.

Profit Maximization Goal
Objective: Large amount of profits Advantages: 1. Easy to calculate profits 2. Easy to determine the link between financial decisions and profits Disadvantages: 1. Emphasizes the short term 2. Ignores risk or uncertainty 3. Ignores the timing of returns 4. Requires immediate resources

Stockholder Wealth Maximization Goal
Objective: Highest market value of common stock

if product B is more risky than product A. It is important to realize that a trade-off exists between risk and return.000 $11. that is. although such postponement is likely to hurt its long-term profitability.000 $10.000 $11. . for example. Consider two products. and their projected earnings over the next 5 years.000 $10. To choose product B. wealth maximization. Considers stockholder¶s return Disadvantages: 1. stockholders would demand a sufficiently large return to compensate for the comparatively greater level of risk.000 $10. Emphasizes the long term 2. Offers no clear relationship between financial decisions and stock price 2. Also.Advantages: 1. as shown below: Year 1 2 3 4 5 Product A $10. However.000 Product B $11. Can promote aggressive and creative accounting practices Profit maximization can be achieved in the short term at the expense of the long-term goal. a firm that wants to show a shortterm profit may.000 A profit maximization approach would favor product B over product A.000 $50.000 $11.000 $11. Example Profit maximization does not consider risk or uncertainty. postpone major repairs or replacement. then the decision is not as straightforward as the figures seem to indicate.000 $10. A and B. Can lead to management anxiety and frustration 3. whereas wealth maximization does. Stockholders expect greater returns from investments of higher risk and vice versa. For example: a costly investment may experience losses in the short term but yield substantial profits in the long term.000 $55. Recognizes risk or uncertainty 3. Recognizes the timing of returns 4.

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