What Are the Differences Between Shareholder Wealth Maximization and Profit Maximization?

What are the differences between shareholder wealth maximization and profit maximization?

Shareholder wealth maximization is the ability of a firm to maximize their common stock market price in order to maximize the wealth of the shareholder’s investment. In order to maximize the stock, the firm must make decisions that benefit the firm long term by taking into account factors such as increasing sales and market share etc. This wealth creation can be expressed in the form of periodic dividend payments or proceeds from the sale of common stock. The goal is to increase present value of the stock by taking into consideration future payments or stream of payments in the long term.

Profit maximization is the predominant objective that comes from microeconomic models of firms. Profit maximization in and of itself does not consider the “big picture” and as a result is a narrow approach to a long term goal in overall wealth maximization and.

the ambiguity of profit a. it isnt clear if a firm should attempt to maximize total profit, the rate of profit or earnings per share whereas wealth maximization would certaintly take this into consideration. Profit maximization ignores the time-value of money and risk, whereas this is an integral part in wealth maximization.

However it is not a useful becaus… profit maximization as a goal doesnt offer a comparison of long term and short term profits.

If a firm chooses to pursue the objective of shareholder wealth maximization, does this preclude the use of profit maximization decision-making rules? Explain.

Pursuing profit maximization can, but doesn’t necessarily have to preclude Shareholder wealth maximization. for example, if a Firm sells shares of its stock and decides to invest the money, it will earn more profit through interest. However, the shareholders are not better off because their ownership has been diluted and therefore worth less even though profit for the firm has increased. in this case profit maximization wouldn’t