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Profit maximization vs wealth maximization

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A simple and comprehensive presentation on Profit maximization v/s Wealth Maximization.

By Arvinder Pal Kaur
Faculty of Management
Northwest Group of Institutions
Dhudhike, MOGA

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Profit maximization vs wealth maximization

  1. 1. S Profit maximization VS Wealth maximization -The conflict
  2. 2. Broadly, there are two alternative objectives that a business firm can pursue  Profit Maximization  Wealth Maximization
  3. 3. 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.
  4. 4. Merits of Profit Maximization S Best Criterion on decision making. S Efficient allocation of resources. S Optimum utilization.
  5. 5. 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.
  6. 6. 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.
  7. 7. 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.
  8. 8. 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.
  9. 9. 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.
  10. 10. Thank you
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A simple and comprehensive presentation on Profit maximization v/s Wealth Maximization. By Arvinder Pal Kaur Faculty of Management Northwest Group of Institutions Dhudhike, MOGA

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