Question

What should a firm do, maximize profit or maximize stakeholder value? The answer must include:

1. a well structured argument

2. pertinent data

Answer 1

Profit maximization refers to how much money profit the company makes. It is a short term approach and a myopic person or business is mostly concerned about short term benefits.. Wealth Maximization/ Maximize Shareholder Wealth is long term process. It refers the value of the company generally expressed in the value of the stock. While shareholders are the literal owners of corporations, there is occasionally tension between shareholders and the company they own. In other words, the best interests of the shareholders are not always the best interests of the firm.According to the shareholder theory, the primary purpose of a firm is usually defined as value maximization (for shareholders). A firm’s value can be maximized only when expected benefits are maximized in the long-run.By this we should keep in mind that value maximization (of equity) is not equivalent to profit maximization. profits are an accounting category and represent the historical performance of a firm; however, they are not the best proxy of what investors can benefit from a firm. Thus, from the perspective of the shareholder value maximization, expected future (free) cash flows are a far more important measure of a firm’s performance. One of the most basic theories of corporations is that they exist to maximize shareholder profit. This is in contrast to other arguably important goals, such as maximizing social welfare, promoting national interests or preserving the economy. While most economists and business scientists agree that maximizing shareholder value is the primary goal of corporations, there is room for debate over whether short-term value or long-term value is the superseding goal.When investors look at a company they not only look at dollar profit but also profit margins, return on capital, and other indicators of efficiency. Profit maximization does not achieve the objectives of the firm’s owners; therefore wealth maximization is better option than profit maximization. Some of the key points why maximizingstakeholder value is better than maximise profit.

1. Profit maximization is short term approach and it refers to how much money the company makes. But Wealth maximization is a long term approach and it refers the value of the company.

2. Profit maximization is a subset of wealth.

3. Profit max ignores timing, cash flows, and risk, but in wealth maximizing those are the key decisions variables.

   Maximization of wealth approach believes that money has time value.