Question

Each of the following is sometimes listed as a reasonable objective for a firm: (a)maximize profit (accounting income), (b) maximize sales (or share of the market), (c)maximize the value of a share of common stock

time periods from now, (d) ensure continuity of existence, (e) maximize the rate of growth, (f) maximize future dividends.Discuss each item and the extent of its relevance to the making of investment decisions.

Answer 1

The following are sometimes listed as a reasonable objective of the firm:

(a) Maximize profit: Profit maximization is related to increasing the revenue (price*quantity sold) and reducing the cost. As profit equals to revenue minus cost, therefore utmost care must be taken to increase the revenue to maximize the profit. Higher profit will help company to pay higher remuneration and higher dividends to shareholders.

(b) Maximize sales: Firms always seeks to gain the market share. They do this to gain the monopoly position in the market to rearn long term profit with increased prices.

(c) maximize the value of the shareholders: It represents maximizing the market price of the shares to maximize the expected return of the shareholders. Value of shareholders can be maximized either by the proceeds of the share in the form of capital gain or increased dividends.

(d) ensure continuity of existence: Company's one of the most important objective is ensuring the continuity of existance. Company must ensure it's continuity in case any disaster happens which may stop the entore work of the company. Company must maintain enough reserves for contingencies for it's proper continuation of operations.

(e)maximize future dividends: As shareholders are an owner of the company. Company must put an effort to maximize the dividends paid to it's shareholders. Company have an option to retain the earnings or pay to shareholders on the form of dividends. Company must take it's decision whether to undertake a new project to earn in the long-term or pay it's earning to shareholders in the form of dividend.