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Profit Maximization vs Wealth maximization


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

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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.

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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23 Responses to “Profit Maximization vs Wealth maximization”

1. dorothy kimathi Says:

2 of 8 12/2/2010 5:03 PM
Profit Maximization vs Wealth maximization http://www.businessblog360.com/2007/11/08/profit-maximization-vs-wea...

June 18th, 2008 at 6:18 am

good material presented but too brief

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

4. okojie ehijie Says:


September 18th, 2008 at 2:20 pm

nice but need to explain more

5. chiranjibi choudhury Says:


September 24th, 2008 at 8:16 am

its very nice lots of example wanted

6. labake Ajayi Says:


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 !

7. bode famuyiwa Says:


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

8. Anju Bell Says:


January 11th, 2009 at 9:34 am

research for a class

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?

10. mukesh Says:


March 3rd, 2009 at 3:16 am

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

11. manish khinchi Says:


May 30th, 2009 at 12:22 am

it’s good but need example also

12. Ashvinder singh Says:


June 4th, 2009 at 8:07 am

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

13. Mwaura Says:


June 20th, 2009 at 1:29 pm

Good idea but need some elaboration

14. mathew Says:


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.

15. Njeru Says:


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.

16. kiran Says:


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.

17. opiyo denis Says:


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.

18. opiyo denis Says:


October 22nd, 2009 at 9:15 am

great sit for finace students

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...

19. Angar Khan Says:


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…

20. DINESH Says:


December 4th, 2009 at 2:20 am

quite good

21. Kanyogoro Says:


December 30th, 2009 at 1:57 am

Good article but too short.

22. DEEPAK GARG Says:


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

23. DEEPAK GARG Says:


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

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