Profit Maximization vs. Maxing Shareholders Wealth
Profit maximization relates only to profits, while shareholder wealth also encompasses total company equity, debt ratios and various other financial performance measure ratios. One’s management could focus on profit maximization over an extended period of time, while the shareholder would prefer continual increases in stock values and corporate total values. These increases are often more commonly known as “getting in and get out”. If management decided to focus on short-term profit maximization this comes at the expense of long-term sales revenues. Ultimately, shareholder wealth/stock price could actually decrease because of the loss of market share.
What are the differences between maximizing profits and
maximizing shareholders wealth?
Shareholder wealth is defined as the present value of the expected forecasting of returns to the owners which are the shareholders of one’s company. These returns can take the form of recurring dividend payments and or proceeds from the sale of the stock. Shareholder wealth is measured by the market value which is the price that the stock trades in the marketplace of a firm's common stock. (James, Charles & Frederick, 2008) Profit maximization is defined as a more fixed concept than shareholder wealth maximization. The profit maximization objective from economic theory does not normally consider the time dimension or the risk dimension in the measurement of profits. In contrast, the shareholder wealth maximization objective provides a convenient framework for evaluating both the timing and the risks associated with various investment and financing strategies. Some marginal decision rules derived from economic theory are extremely useful to a wealth maximizing firm. Any decision, regardless of the duration short or long inevitably results in marginal revenues exceeding the marginal costs of the decision will be consistent with wealth...
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