Question 1.RQ.2: Why is the maximisation of wealth viewed as superior to prof...

Financial Management for Decision Makers

Why is the maximisation of wealth viewed as superior to profit maximisation as a business objective?

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Wealth maximisation is considered to be superior to profit maximisation for the following reasons:

$\bullet$ The term ‘profit’ is ambiguous. Different measures of profit can lead to different decisions being made, as we saw in the chapter.
$\bullet$ Profit maximisation in the short term may be at the expense of profit maximisation in the long term.
$\bullet$ Profit maximisation ignores the issue of risk. This may lead to decisions that result in investments in risky projects in order to gain higher returns. However, this may not meet with shareholders’ needs.

Wealth maximisation takes both risk and long-run returns into account.

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