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

Define forward exchange rate will be an unbiased predictor, Explain the con...

Explain the conditions under which the forward exchange rate will be an unbiased predictor of the future spot exchange rate. Answer:  the conditions when forward exchange rate

Explain marginal cost of capital, Q. Explain Marginal cost of capital? ...

Q. Explain Marginal cost of capital? The calculation of cost of capital focused when the firms total financing and its paten of financing is given and remains constant. However

Fin 2110, 1. Which of the following statements concerning the cash flow pro...

1. Which of the following statements concerning the cash flow production cycle is true? a) The profits reported in a given time period equal the cash flows generated. b) A company’

Outline the objectives of alm, You are a member of the ALM Committee (ALCO)...

You are a member of the ALM Committee (ALCO) of ANZ Bank. A visiting member has some queries relating to the general framework of the ALM and interest rate risk impact on the incom

Calculate super normal profit, The economic analysis is done for Schlumberg...

The economic analysis is done for Schlumberger, oilfield service company. They are # 1 in terms of market caps, revenue and employees globally. If any references are used / outside

Explain the term finance companies, Finance companies Finance companies...

Finance companies Finance companies make loans to individuals as well as corporations by providing consumer lending business lending also mortgage financing. A few of their loa

International bonds, International bonds are divided into two c...

International bonds are divided into two categories namely, foreign bonds and euro bonds. Foreign bonds are issued by a borrowing company in another

Assignment ., Gretz Tool Company is a large U.S based Multinational Corpora...

Gretz Tool Company is a large U.S based Multinational Corporation with subsidiaries in eight different countries. The parent of Gretz provided initial cash infusion to establish ea

Liquidity risk, An investor, who wants to sell a bond even before it ...

An investor, who wants to sell a bond even before it reaches its maturity date, would be concerned as to whether he will receive a price that is close to the true

Design, D esign, Drawing and Bill of Quantities (BOQ) for works We dis...

D esign, Drawing and Bill of Quantities (BOQ) for works We discussed about INCO terms which are set standards for the project. Now let us learn about other parameters for cont

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