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Acts as a yardstick for computing the operational efficiency of the entity. Gaining a large market share. Recognition of Time Pattern of Returns No Yes Definition of Profit Maximization Profit Maximization is the capability of the firm in producing maximum output with the limited input, or it uses minimum input for producing stated output.
It is termed as the foremost objective of the company. Profit is a long term objective, but it has a short-term perspective i. Profit can be calculated by deducting Wealth maximisation cost from total revenue. Through profit maximization, a firm can be able to ascertain the input-output levels, which gives the highest amount of profit.
Definition of Wealth Maximization Wealth maximizsation is the ability of a company to increase the market value of its common stock over time.
It is the versatile goal of the company and highly recommended criterion for evaluating the performance of a business organisation. It has been universally accepted that the fundamental goal of the business enterprise is to increase the wealth of its shareholders, as they are the owners of the undertaking, and they buy the shares of the company with the expectation that it will give some return after a period.
The value is based on two factors: Rate of Earning per share Capitalization Rate Key Differences Between Profit Maximization and Wealth Maximization The fundamental differences between profit maximization and wealth maximization is explained in points below: The process through which the company is capable of increasing earning capacity known as Profit Maximization.
Profit maximization is a short term objective of the firm while the long-term objective is Wealth Maximization.
Profit Maximization ignores risk and uncertainty. Unlike Wealth Maximization, which considers both. Profit Maximization avoids time value of money, but Wealth Maximization recognises it.
Profit Maximization is necessary for the survival and growth of the enterprise. We cannot say that which one is better, but we can discuss which is more important for a company. Profit is the basic requirement of any entity.
Otherwise, it will lose its capital and cannot be able to survive in the long run. But, as we all know, the risk is always associated with profit or in the simple language profit is directly proportional to risk and the higher the profit, the higher will be the risk involved with it.
So, for gaining the larger amount of profit a finance manager has to take such decision which will give a boost to the profitability of the enterprise.
In the short run, the risk factor can be neglected, but in the long-term, the entity cannot ignore the uncertainty.
Shareholders are investing their money in the company with the hope of getting good returns and if they see that nothing is done to increase their wealth.Wealth maximization is the concept of increasing the value of a business in order to increase the value of the shares held by stockholders.
The concept requires a company's management team to continually search for the highest possible returns on funds invested . contributing to profit.
ROCE will provide an indication of the efficient use of capital in generating profit. The risk taken is measured by the margin of safety which shows how far current sales would have to fall to result in a breakeven profit situation.
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Wealth maximization objective is a widely recognized criterion with which the performance a business enterprise is evaluated.
The world wealth refers to the net present worth of the firm. Therefore, wealth maximization is also stated as net present worth. Examination of theories behind corporate governance provides a foundation for understanding the issue in greater depth and a link between an historical perspective .
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