Case Study

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Assignment of Financial Management Prepared By:- Question - Differentiate between profit maximization and wealth maximization? Answer- Let us first understand the definition of both the terms. Profit maximization:- Profit maximization basically means a process by which a company undergo to determine the best output and price levels in order to maximize its return. Profit maximization is a good thing for a company, but can be a bad thing for consumers if the company starts to use cheaper products or decides to raise prices Wealth maximization:- Wealth maximization simply means maximization of shareholder’s wealth. It is combination of two words wealth and maximization. Wealth of a shareholder maximize when the net worth of a company maximizes. Wealth or Value of a business is defined as the market price of the capital invested by shareholders. Basis of differentiation | Profit Maximization | Wealth Maximization | Meaning | Profit maximization, as the name suggests that it is related to company’s profits. | Wealth maximization, it means wealth of the shareholders of the company in the market i.e. the current market price of the capital invested by them. | Approach | Profit maximization is basically a traditional approach | Wealth maximization is a modern day approach; generally most of the company follow this approach. | Time of determining | It is determined at the end of the period (quarterly or annually). | It is determined by the change in the stock price of the company over a period. | Value | Profit maximization measures the value of an entity in terms of the currency profits that it makes. | Wealth maximization goal is the value of an entity expressed in terms of the market value of its common stock | Time value of money | Profit maximization does not consider the time value of money. The profit made today and the profit made

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