Profit Maximisation vs Wealth Maximisation

# Profit Maximisation vs Wealth Maximisation

## The Two Stated Objectives

### (i) Profit Maximisation

Traditionally, the primary objective of a company is said to be earning profit, so financial management should aim at profit maximisation. Profit here is measured as the total accounting profit available to shareholders.

### (ii) Wealth / Value Maximisation

Shareholders' wealth is the result of a cost-benefit analysis adjusted for timing and risk — i.e., the time value of money.

$$\text{Wealth} = \text{PV of benefits} - \text{PV of costs}$$

Wealth maximisation focuses on the market price of the firm's stock — the focal judgment of all market participants about the firm's value, considering present and future EPS, timing, risk, dividend policy and other factors.

## Conflicts Between the Two

Profit maximisation is a short-term, limited objective and cannot be the sole goal because:

1. The term profit is vague — short term or long term? Before or after tax? Total or per share?

2. It must be attempted with awareness of the risk involved — high profits often involve high risk.

3. It ignores the time pattern of returns — does not distinguish ₹100 today from ₹100 in 10 years.

4. It is too narrow — ignores social obligations, workers, consumers, ethical practices.

Wealth maximisation, in contrast, encourages efficient use of resources, cost reduction, and policies that promote long-term value.

## Why Wealth Maximisation is Superior

1. Considers all future cash flows — dividends, EPS, and risk of decisions. Profit maximisation does not consider EPS, dividends, or shareholder returns.

2. A firm pursuing wealth maximisation may pay regular dividends; a profit-maximising firm may withhold them.

3. Shareholders prefer increases in wealth over a mere increase in accounting profit.

4. The market price of a share captures expected returns, timing differences, risk and distribution policy.

Profit maximisation can therefore be viewed as a part of the broader wealth-maximisation strategy — not the sole criterion.

## Why Profit Maximisation is Not an 'Operationally Feasible' Criterion

It fails as a working criterion for ranking alternative courses of action because:

• Vague term — multiple interpretations of 'profit'.
• Ignores timing of returns — no consideration of time value of money.
• Ignores risk.
• 'Maximisation' itself is vague.

## Quick Comparison