Profit Maximization vs Wealth maximization

Published by admin on November 8th, 2007 | Tagged Business, Corporate Social Responsibilities, Management

The traditional approach of financial management was all about profit maximization.The main objective of companies was to make profits.

The traditional approach of financial management had many limitations:

1.Business may have several other objectives other than profit maximization.Companies may have goals like: a larger market share, high sales,greater stability and so on.The traditional approach did not take into account so many of these other aspects.

2.Profit Maximization has to defined after taking into account many things like:

   a.Short term,mid term,and long term profits

   b.Profits over period of time

The traditional approach ignored these important points.

3.Social Responsibility is one of the most important objectives of many firms.Big corporates make an effort towards giving back something to the society.The big companies use a certain amount of the profits for social causes.It seems that the traditional approach did not consider this point.

Modern Approach is about the idea of wealth maximization.This involves increasing the Earning per share of the shareholders and to maximize the net present worth.

Wealth is equal to the the difference between gross present worth of some decision or course of action and the investment required to achieve the expected benefits.

Gross present worth involves the capitalised value of the expected benefits.This value is discounted a some rate,this rate depends on the certainty or uncertainty factor of the expected benefits.

The Wealth Maximization approach is concerned with the amount of cash flow generated by a course of action rather than the profits.

Any course of action that has net present worth above zero or in other words,creates wealth should be selected.

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23 Responses to “Profit Maximization vs Wealth maximization”

  1. dorothy kimathiNo Gravatar Says:

    good material presented but too brief

  2. jyotiNo Gravatar Says:

    plz explain me what is the main distinguesh between profit maximization or wealth maximization in pointwise method?

  3. BudiNo Gravatar Says:

    it’s good idea, but it’s better if follow with transaction examples and strategy

  4. okojie ehijieNo Gravatar Says:

    nice but need to explain more

  5. chiranjibi choudhuryNo Gravatar Says:

    its very nice lots of example wanted

  6. labake AjayiNo Gravatar Says:

    Profit maximization deal more on the quality of decision made by the company, why profit mazimazation is only concerned on how much te firm makes. e.g if the company invest $100,000.00 the shareholder equity into oil and the return on investment is only 10%, while if the same money was invested into property management woould yield 55%.What the company has doen in the former is just created profit while the latter has created wealth. Good Investment decision !

  7. bode famuyiwaNo Gravatar Says:

    Your idea Is satisfying and it can be deduced that wealth maximisation attracts more investores and improve managerial decision

  8. Anju BellNo Gravatar Says:

    research for a class

  9. aidaNo Gravatar Says:

    thanks fordistinguishing between the two but what are the macro economic variables that affect the wealth maximization objective of financial managers in corporations?

  10. mukeshNo Gravatar Says:

    its very good information about the wealth maximisation , but tell me in one line what is just wealth maximisation

  11. manish khinchiNo Gravatar Says:

    it’s good but need example also

  12. Ashvinder singhNo Gravatar Says:

    good data but very brief should cover examples of companies following different methods or policies

  13. MwauraNo Gravatar Says:

    Good idea but need some elaboration

  14. mathewNo Gravatar Says:

    The article is good.
    But need to be more explanatory. Examples need to be quoted for deeper understanding.

  15. NjeruNo Gravatar Says:

    The article is very good.
    In simple terms the goal of any firm should be the maximization shareholders wealth and not profit.
    Profit maximization has several limitations including;
    1.The word profit is ambiguous It is not clear whether profits should be maximized in the short term or long term.
    2.The time value for money is not considered when determining profits.
    3.The theory assumes a perfect market which is not applicable in modern imperfect markets.
    4.It is difficult to achieve a market economy where the price system operates effectively.
    5. It ignores risk.

  16. kiranNo Gravatar Says:

    i just confused about difference between wealth maximisation and profit maximisation and value maximisation. please tell me in detail.

  17. opiyo denisNo Gravatar Says:

    I think thisis avery good sub topic to clearly diferenciate the two key terms of profit maximization and wealth maximisation. Continue with thisgood publication.

  18. opiyo denisNo Gravatar Says:

    great sit for finace students

  19. Angar KhanNo Gravatar Says:

    profit maximization is the maximizing of money or terms of money,but not considering long term objective & goodwill of company, while Wealth maximization is concerned about the earning of goodwill & return on investment for a long time…
    e.g: A makes a DJ Group, they make lot of advertisement to sell the tickets, but people finds it with low quality of sound system & not good music… A just wanted to earn money at the time & what do u think people will go to his show in the same city again ? its’ only profit maximization… While Sony Music makes a real deal of making music with high quality… thus they have long run income in the business of music.. if they conduct a concert, live show, DJ Party, music CD… All will be accepted because they have raised their wealth maximization…

  20. DINESHNo Gravatar Says:

    quite good

  21. KanyogoroNo Gravatar Says:

    Good article but too short.

  22. DEEPAK GARGNo Gravatar Says:

    GOOD IDEA BUT SOME IMPROVEMENTS DO THERE

    AFTER ALL EVERY THING IS RIGT THAT TIME

    NOW SOME CHANGES R HERE

  23. DEEPAK GARGNo Gravatar Says:

    BECAUSE IT IS TOO SHORT

    EXPLAIN IN BRIEF SUMMARY WIHT SOME PRACTICAL EXAMPLES WILL BE THERE

    IT IS VERY HELPFUL TO US FOR EASY MAINTAIN TO ADJUSTING OR UNDERSTANDING