In finance theory, the goal of the firm is said to be “maximize wealth” instead of “maximize profit.”

Define shareholder wealth. How would one measure shareholder wealth?
Briefly discuss two limitations of “profit maximization” as a goal for the firm.

Expert Solution

a. Shareholder wealth is the value of the investment that the investors have in the firm. It is measured through the return on the investment that the investors derive out of their invest in the firm.

b. Profit maximization limitations are :

1. The firm may not focus on long term sustainability factors such as growth, customer relationship management and business expansion.

2. In order to make more profits or make the balance look so, the management may engage in unethical means to satisfy the shareholders.

jeff jeffy answered 2 years ago

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In finance theory, the goal of the firm is said to be “maximize wealth” instead of “maximize profit.”

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