Show objections against profit maximization, Financial Management

Assignment Help:

Q. Show objections against profit maximization?

1) Profit cannot be ascertained well in advance to express the. Probability of return as future is Uncertain. It is not at all possible to maximize what cannot be known. Moreover, the term profit is vague and has not been explained clearly what it means. It may be total profit before tax or after tax or profitability rate. Profitability rate, again is ambiguous as it may be in relation to capital employed, share capital, owner's funds. Or sales. This vagueness is not present in wealth maximization goal as the concept of wealth is very clear. It represents value of benefits minus the cost of investment.

2) The executive or the decision maker may not have enough confidence in the estimates of future returns so that he does not attempt further to maximize. It is argued that firm's goal cannot be to maximize profits but to attain a certain level or rate of profit holding certain share of the market or certain level of sales. Firms should try to 'satisfy' rather than to 'maximize'.

3) There must be a balance between expected return and risk. The possibility of higher expected yields are associated with greater risk to recognize such a balance and wealth maximization is brought into the analysis. In such cases, higher capitalization rate involves. Such combination of Financial Management expected returns with risk variations and related capitalization rate cannot be considered in the concept of profit maximization.

4) The goal of maximization of profits is considered to be a narrow outlook. Evidently when profit. Maximization becomes the basis of financial decisions of the concern, it ignores the interests of the community on the one hand and that of the government, workers and other concerned persons in the enterprise on the other hand.

5) The criterion of profit maximization ignores time value factor. It considers the total benefits or profits into account while considering a project whereas the length of time in earning that profit is not considered at all, whereas the wealth maximization concept fully endorses the time value factor in evaluating cash flows. Keeping the goals of financial management in view, most of the thinkers on the subject have come to the conclusion that the aim of an enterprise should be wealth maximization and not the profit maximization. Professor Soloman of Stanford University has handled the issue very logically. He argues that it is useful to make a distinction between profit and 'profitability'. Maximization of profits with a view to maximizing the wealth of shareholders is clearly an unreal motive. On the other hand, profitability maximization with a view to using resources to yield economic values higher than the joint values of inputs required is a usefl.JJ goal. Thus, the proper goal of financial management is wealth maximization.


Related Discussions:- Show objections against profit maximization

Evaluation of bids, E v aluation of  bids and determination of the lowes...

E v aluation of  bids and determination of the lowest  evaluated responsive and qualified bidder You learnt how to receive and open bids in the previous sub section. Here you

Payout policy, mini-case chapter 15:payout policy Megginson, Smart, Graham

mini-case chapter 15:payout policy Megginson, Smart, Graham

Financial position as assets, One of the well-known soccer clubs in Austral...

One of the well-known soccer clubs in Australia, Sydney, has made a decision to include its players on the club's statement of financial position as assets. These players are signe

Explain the exposure is the regression coefficient, Explain the statement: ...

Explain the statement: “Exposure is the regression coefficient”. Answer: Exposure to currency risk can be suitably calculated by the sensitivity of the firm’s future cash flows a

Cost of Capital, The Nu-Nu Brothers Inc. (NNBI) has the following capital s...

The Nu-Nu Brothers Inc. (NNBI) has the following capital structure, which it considers to be optional: Debt 25% Preferred Stock 15% Common Equity 60% NNBI''''s expected net income

Type of hedge funds, What are the Types of Hedge Funds? Please provide me r...

What are the Types of Hedge Funds? Please provide me report on Types of Hedge Funds.

Yield to call, Yield to call is the yield that would be realized on a...

Yield to call is the yield that would be realized on a callable bond assuming the issuer of the bond redeems it before maturity. A bond's call provision is detail

Fund raising and investment, Fund Raising and Investment: Fund commitme...

Fund Raising and Investment: Fund commitment requirement in Hedge Funds sometimes exceeds millions of dollars. In addition, high minimum investments are sometimes closed to new

Interpretations of long term solvency or liquidity ratio''s, Long Term Solv...

Long Term Solvency or Liquidity Ratio's   DE:          The Debt Equity ratio exhibits the relation that exists between debt and proprietor's fund and is considered a very im

Lien, A legal claim on exact assets which were used to make loan secure.

A legal claim on exact assets which were used to make loan secure.

Write Your Message!

Captcha
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