What is shareholder wealth?
1. Wealth maximization process?
2. Maximization of wealth of shareholder?
3. The profit maximization of shareholders?
4. What is profit maximization in business?
5. Difference between profit and shareholder?
6. Goal of maximization of shareholder wealth?
7. Wealth maximization or profit maximization?
From an accounting perspective, profit is the difference between the price and cost of a product or a service. From an economic perspective, profits are the gains derived from an investment when the total returns exceed the invested capital. Profits are generally measured over a period of time.
Types of Profits
Profits can be of several types:
• Gross profits: This profit is the difference between the sales price and the direct costs incurred in manufacturing a product. This type of profit helps a business decide its pricing policies and the use of materials. • Net profits: Net profits can be calculated by subtracting overall expenses incurred for the normal running of a business from the gross profit. • Net profit after interest and taxation: The profit after the deduction of taxes to the government and interest payments on loans is called net profit after interest and taxation. • Retained profit: This is the profit that is left over after a firm pays off dividends to its shareholders. • Economic profit: This profit is realized from a product when revenues generated from it are higher than the total opportunity cost of its input materials. • Accounting profit: This is the difference between revenues and accounting costs paid for inputs. • Normal profits: This is the opportunity cost of labor and capital.
How Shareholders' Wealth Grows.
Shareholders benefit financially from their investment in successful companies in three main ways: 1. Dividends, which are a distribution of part of a company's net profit to shareholders, as part owners of the company. Most large industrial companies pay dividends twice yearly, and often these dividends have tax advantages as well, because of a system called dividend imputation. 2. Capital growth, which is the increase in the market value of a company's shares over the total cost of those shares. It usually reflects the growth in the company's profits and assets, but it can also be affected by a change in the sentiment of the whole share market as it goes through its cycles. Prices of shares are determined by supply and demand, just as in any market. 3. New Issues of shares, which may be made by a company when it requires further funds. Such new shares are usually offered at a discount to existing shareholders, based on a predetermined ratio, without having to pay brokerage. The entitlements to the new shares offered are know as Rights, as shareholders have the right to acquire the shares or to sell the rights to these new shares on the stock market. A company may also make a Bonus Issue to shareholders at no cost. Shareholders receive an Annual Report each year that details the company's operations and its financial state, and are entitled to vote at Annual General Meetings and other general meetings of the company.
Wealth maximization or profit maximization?
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 define 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...
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