Profit maximization VS

Wealth maximization
-The conflict

S
 Broadly, there are two
alternative objectives that a
business firm can pursue

 Profit Maximization

 Wealth Maximization
 Profit Maximization

S It is a term which denotes the maximum profit to be

earned by an organization in a given period of time.

S The profit maximization goal implies that the

Investment, Financing and Dividend decisions of the
enterprise should be oriented to profit maximization.
Merits of Profit Maximization

S Best Criterion on decision making.

S Efficient allocation of resources.

S Optimum utilization.
 Drawbacks of Profit
Maximization
S It ignores time value of money.

S It is vague conceptually.

S It ignores the risk factor.

S It may tempt to make such decisions which may in

the long run prove disastrous.
S Its emphasis is generally on Short run projects.

S In the new business environment Profit maximization

is regarded as unrealistic, difficult, inappropriate
and immoral.
 Wealth Maximization

S Fundamental objective of wealth maximization is to

maximize the market value of the firm’s shares.

S Maximizes the net present value of a course of

action to the shareholders.

S Accounts for the timing and risk of expected

benefits.

S Benefits are measured in terms of cash flows.

Merits of Wealth Maximization

S The wealth maximization objective takes care of the:

 Shareholder’s interest

 lender’s or creditor’s interest

 Worker’s or employees’ interest

 It also ensures fair return to the shareholders, building up

reserves for growth and expansion, ensuring financial
discipline in the management.
Merits of Wealth Maximization

S It focuses on the long term.

S It takes into account the time value of money.

S It considers risk.

S It maintains market price of the shares of the

organization.
S It recognizes the value of regular dividend
payments.
 Conflict
Profit Maximization
S Its main objective is to earn
large amount of profits.
S It emphasizes short term
S It ignores time value of
money.
S It ignores risk and uncertainty.
S It ignores timimg of return
Wealth Maximization
S Its main objective is to achieve
highest market value of common
stock.
S It emphasizes long term
S It considers time value of money.
S It recognizes risk and uncertainty.
S It recognizes the timings of
return.
Thank you