Is "profit maximization" consistent with "shareholder-wealth maximization"?

Expert Solution

While a firm focuses on both profit maximization as well as shareholder wealth maximization, there is an inherent difference between the two.

Every firm has to make profits to ensure that it covers the costs and provide the excess funds for future investment and growth. This is a measure of efficiency and performance of a firm and thus ensures that a firm continues to grow. However,a profit is only an accounting measure and there can be multiple interpretations for profit of a firm. This objective ignores the time value of money and does not take into consideration the earnings stream.

On the other hand, wealth maximization is about increasing the market value of shareholders equity. While profits aid in the wealth maximization, it is more of the future cash flow from the business that helps maximize the wealth of shareholders. The individual shareholder can maximize his wealth by increasing his own utility from the fim's wealth maximization. The emphasis is more on long term goals of the firm and takes into consideration the time value of money.

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