Question

We know that the goal of corporate financial management is the maximisation of the share price (or the market value of the firm). One question that might be asked is why don't financial managers just maximise profits instead? Which of the following points explain why it would be problematic to set profit maximisation as the goal of financial management?

Select one:

a. "Profit" is not a well-defined concept. It can mean one thing to a business person and something different to an accountant.

b. Accounting profits are not necessarily the same as cash flows.

c. Profit maximisation does not consider the time value of money.

d. Profit maximisation ignores uncertainty or risk associated with cash flows.

e. All of the above.

Answer 1

The Correct option is all of the above

The Profit amximisation can not be the only motive of the company as they operate in the highly competitive environment so it would not be possible many time to gain profit but there may be chance that the firm is able to gain the market share by reducing the price or gaining the interest of the customers, which helps them to drive the sale but relatively at lower margin and the meaning of profit can be different to most of the people.

Profit amximisation ignores the risk as there may be time when the firm need to shell out money to invest in capital expenditure or other expenses.