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.
23 Responses to “Profit Maximization vs Wealth maximization”
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June 18th, 2008 at 6:18 am
good material presented but too brief
June 29th, 2008 at 11:57 pm
plz explain me what is the main distinguesh between profit maximization or wealth maximization in pointwise method?
July 28th, 2008 at 3:42 am
it’s good idea, but it’s better if follow with transaction examples and strategy
September 18th, 2008 at 2:20 pm
nice but need to explain more
September 24th, 2008 at 8:16 am
its very nice lots of example wanted
October 30th, 2008 at 10:22 am
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 !
November 3rd, 2008 at 5:45 pm
Your idea Is satisfying and it can be deduced that wealth maximisation attracts more investores and improve managerial decision
January 11th, 2009 at 9:34 am
research for a class
February 3rd, 2009 at 2:16 am
thanks fordistinguishing between the two but what are the macro economic variables that affect the wealth maximization objective of financial managers in corporations?
March 3rd, 2009 at 3:16 am
its very good information about the wealth maximisation , but tell me in one line what is just wealth maximisation
May 30th, 2009 at 12:22 am
it’s good but need example also
June 4th, 2009 at 8:07 am
good data but very brief should cover examples of companies following different methods or policies
June 20th, 2009 at 1:29 pm
Good idea but need some elaboration
July 21st, 2009 at 12:26 am
The article is good.
But need to be more explanatory. Examples need to be quoted for deeper understanding.
July 22nd, 2009 at 12:57 am
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.
October 8th, 2009 at 9:08 am
i just confused about difference between wealth maximisation and profit maximisation and value maximisation. please tell me in detail.
October 22nd, 2009 at 5:58 am
I think thisis avery good sub topic to clearly diferenciate the two key terms of profit maximization and wealth maximisation. Continue with thisgood publication.
October 22nd, 2009 at 9:15 am
great sit for finace students
November 21st, 2009 at 12:40 am
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…
December 4th, 2009 at 2:20 am
quite good
December 30th, 2009 at 1:57 am
Good article but too short.
January 29th, 2010 at 5:56 am
GOOD IDEA BUT SOME IMPROVEMENTS DO THERE
AFTER ALL EVERY THING IS RIGT THAT TIME
NOW SOME CHANGES R HERE
January 29th, 2010 at 5:59 am
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