Christ College Education| BBM 101| The Profit Maximization is not an Operationally Feasible Criterion

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The profit maximization is not an operationally feasible criterion.’ Do you agree? Illustrate your views and also explain, in what ways is the wealth maximizing objective superior to the profit m... aximization objective? Answer: “The profit maximisation is not an operationally feasible criterion.” • The aforesaid statement is true because profit maximisation can be a short-term objective for any organisation and cannot be its sole objective. • Profit maximization fails to serve as an operational criterion for maximizing the owner’s economic welfare. • It fails to provide an operationally feasible measure for ranking alternative courses of action in terms of their economic efficiency. It suffers from the following limitations: (i) Vague term: The definition of the term profit is ambiguous. Does it mean short term or long term profit? Does it refer to profit before or after-tax? Total profit or profit per share? (ii) Timing of Return: The profit maximization objective does not make a distinction between returns received in different time periods. It gives no consideration to the time value of money, and values benefits received today and benefits received after a period as the same. (iii) Risk Factor: It ignores the risk factor. The term maximization is also vague. ● Wealth maximization is superior to the profit maximization because the main aim of the business concern under this concept is to improve the value or wealth of the shareholders. ● Wealth maximization considers the comparison of the value to cost associated with the business concern. Total value detected from the total cost incurred for the business operation. It provides extract value of the business concern. This concept considers both time and risk of the business concern. This criterion provides efficient allocation of resources and it also ensures the economic interest of the society. ● The wealth maximization criterion is based on cash flows generated and not on accounting profit. The computation of cash inflows and cash outflows is precise. ● Wealth maximization can be activated only with the help of the profitable position of the business concern. So the goal of maximizing the value of the stock avoids the problems associated with the different goals we discussed above. In simple language, good financial decisions increase the market value of the owners’ equity and poor financial decisions decrease it. So the financial manager best serves the owners of the business by identifying goods and services that add value to the firm because they are desired and valued in the free marketplace [Show More]

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