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

It is a term which denotes the maximum profit

to be earned by an organization in a given
period of time.
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

Best Criterion on decision making.

Efficient allocation of resources.

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

It is vague conceptually.

It ignores the risk factor.

It may tempt to make such decisions which may

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

In the new business environment Profit

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

Fundamental objective of wealth maximization is

to maximize the market value of the firms shares.
Maximizes the net present value of a course of
action to the shareholders.
Accounts for the timing and risk of expected
benefits.
Benefits are measured in terms of cash flows.
 Merits of Wealth
Maximization

The wealth maximization objective takes care of the:

Shareholders interest

lenders or creditors interest

Workers 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

It focuses on the long term.

It takes into account the time value of money.

It considers risk.

It maintains market price of the shares of the

organization.
It recognizes the value of regular dividend
payments.
Conflict

Profit Wealth
Maximization Maximization
Its main objective is to earn Its main objective is to achieve

large amount of profits. highest market value of common

stock.
It emphasizes short term It emphasizes long term

It ignores time value of It considers time value of

money. money.
It recognizes risk and
It ignores risk and
uncertainty.
uncertainty.
It recognizes the timings of
It ignores timimg of return return.
Thank you