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

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

Investment decision and cost of capital, INVESTMENT DECISION AND COST OF CA...

INVESTMENT DECISION AND COST OF CAPITAL In Finance, investment decision is disclose the allocation of funds in fixed assets or long term. This decision is also known as capita

What is the de-merger, What is the De-merger This is splitting up of a ...

What is the De-merger This is splitting up of a group into two or more separate bodies. The group is split into separate entities, but the shareholders remain the same. It is o

What are the disclosure requirements, Disclosure requirements · Common...

Disclosure requirements · Common information about how operating segments were identified and types of products and services from which every operating segment derives its rev

Expalin investment intermediaries, Investment intermediaries An investm...

Investment intermediaries An investment intermediary includes finance companies, mutual funds, investment banks and securities firms.

Definition of cost of capital, Definition of cost of capital In analyzi...

Definition of cost of capital In analyzing the cost of capital it is presumed that business risk of the firm remains unchanged (i.e., that projects accepted don't affect the va

State the types of integration, State the Types of integration ...

State the Types of integration Types of integration Horizontal Target company has same operations, and is in the same industry

Misconceptions about financial manmagement, What are the misconceptions abo...

What are the misconceptions about Financial Management?

State the factors of small organisations, State the factors of Small organi...

State the factors of Small organisations - More creative and dynamic - More flexible to adapt to environmental changes - More informal and small for example some people l

Types of mortgages, Types of Mortgages 1. Traditional...

Types of Mortgages 1. Traditional Mortgages 2. Non -  Traditional Mortgages 3.  Graduated-Payment Mortgages (GPMs) 4.  Pledged-Account Mortg

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