Show limitations of profit maximization, Financial Management

Assignment Help:

Q. Show Limitations of Profit maximization?

The Profit maximization criterion is criticized on the following grounds:

i) Quality of Benefits: Profit maximization approach ignores the quality aspects of benefits Associated with a financial course of action. The quality means the degree of certainty with which benefits are expected.

ii) Ambiguity-Vague: The term 'profit' is vague and has different interpretations. It means different things to different people. It can be pre-tax or post-tax profit. It is not clear whether it is short-term profit or long-term profit. Does it mean operating profit or profit available for shareholders? The other equivalent term, often used, is 'Return'. Return can be on total capital employed or total assets or shareholders equity and so on.

iii) Timing and Value of Money-Ignored: The concept of Profit maximization does not help in making a choice between projects, giving different benefits, spread over a period of time. It ignores the difference in time in respect of benefits arising from the similar amount of investment. The fact that a rupee received today is more valuable than the rupee received --, later is ignored in this concept.

iv) Change in Organization Structure: Principle of Profit maximization was, earlier, accepted when the structure of the business was sole proprietorship. In this type of structure, sole proprietor managed the business, individually, and was the recipient of total profits. As total profit belonged to him, his wealth maximized. This was the picture in 19th century, when the business was, totally, self-managed.

v) Social Welfare may be ignored: Due to Profit maximization objective, business may produce goods and services, which may not be necessary and beneficial to the society. So, it is, indeed, doubtful how far the Profit maximization objective serves or promotes social welfare, let alone optimizes social welfare.

vi) Ignores Financing and Dividend Aspects: The Profit maximization concept concentrates on profitability aspect alone and impact of financing and dividend decisions on the market value of shares are, totally, ignored.

Thus, it is concluded that Profit maximization should be the basic criteria for decision-making. The primary responsibility of financial manager is to strike judicious balance between return and risk in order to maximize the profits.

Related Discussions:- Show limitations of profit maximization

Adjustment of prepaid insurance, Accountants should not reverse the adjustm...

Accountants should not reverse the adjustment of prepaid insurance to recognize insurance expense at the end of the accounting period because: Answer a. . doing so results in

Federal agency securities, Federal Agency Securities are those securi...

Federal Agency Securities are those securities issued by federally related institutions and those issued by Government-Sponsored Enterprises (GSE). Securities iss

Nature of current liabilities, Current Liabilities: A liability is an ...

Current Liabilities: A liability is an obligation to convey assets or do services at some future date. For purposes of balance sheet analysis, it is important to create a dist

Important features floating rate notes, Reference Index Every FRN choos...

Reference Index Every FRN chooses its own reference index upon which the calculation of each successive new coupon is based. The most commonly used reference index is LIBOR. It

How does continuous compounding benefit an investor, How does continuous co...

How does continuous compounding benefit an investor? The effect of enhancing the number of compounding periods per year is to increase the future value of the investment.  The

Explain due date and due diligence, Q. Explain Due Date and Due Diligence? ...

Q. Explain Due Date and Due Diligence? Due Date -Every governing agency and its forms scheduled reporting and most significantly payments have a required due date. It's this

Collateralized mortgage obligations (cmos), Collateralized Mo...

Collateralized Mortgage Obligations (CMOs) CMOs retain many of the yield and credit quality advantages of pass-throughs, while eliminating some of the

Define factors for investing in the emerging stock market, As an investor, ...

As an investor, what factors would you consider before investing in the emerging stock market of a developing country? Answer:  An investor in emerging market stocks requirements

hazard or risk , For this assessment, you are required to choose one workp...

For this assessment, you are required to choose one workplace hazard or risk to safety in the financial services industry that interests you. Prepare a report on the area you have

The us treasuries and other government securities, The United S...

The United States of America issues US Treasuries, which are negotiable government debt obligations. They are popular because they are backed by the full

Write Your Message!

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd