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The traditional approach of financial management was all about profit maximization.The main objective of
companies was to make profits.
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:
1 of 8 12/2/2010 5:03 PM
Profit Maximization vs Wealth maximization http://www.businessblog360.com/2007/11/08/profit-maximization-vs-wea...
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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Profit Maximization vs Wealth maximization http://www.businessblog360.com/2007/11/08/profit-maximization-vs-wea...
2. jyoti Says:
June 29th, 2008 at 11:57 pm
plz explain me what is the main distinguesh between profit maximization or wealth maximization in
pointwise method?
3. Budi Says:
July 28th, 2008 at 3:42 am
it’s good idea, but it’s better if follow with transaction examples and strategy
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 !
Your idea Is satisfying and it can be deduced that wealth maximisation attracts more investores and
improve managerial decision
9. aida Says:
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?
3 of 8 12/2/2010 5:03 PM
Profit Maximization vs Wealth maximization http://www.businessblog360.com/2007/11/08/profit-maximization-vs-wea...
its very good information about the wealth maximisation , but tell me in one line what is just wealth
maximisation
good data but very brief should cover examples of companies following different methods or policies
i just confused about difference between wealth maximisation and profit maximisation and value
maximisation. please tell me in detail.
I think thisis avery good sub topic to clearly diferenciate the two key terms of profit maximization and
wealth maximisation. Continue with thisgood publication.
4 of 8 12/2/2010 5:03 PM
Profit Maximization vs Wealth maximization http://www.businessblog360.com/2007/11/08/profit-maximization-vs-wea...
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…
quite good
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