Question

Name and discuss two main goals of finance. Are these goals mutually exclusive? Explain your answer.

Answer 1

The two main goals of finance is profit maximization and wealth maximization.

a) Profit maximization - The name itself signifies that the main aim is to maximize the profit of the firm by managing the financial resources available to firm. This goal is short term and does not help the stakeholders. They focus mainly on profit which have different definition in accounting.

B) Wealth maximization - The main aim of this goal is to increase the value of the firm, so that the stakeholders can be benefitted. It is a long term objective and mainly focused on stakeholders. They focus on cash flows which are more reliable rather than profit, because it takes into consideration time value of money.

Yes, they are mutually exclusive as both the goals cannot be achieved at the same time. A firm can either maximize it's profit or try to increase their value or wealth.

If the firm focus on profit then they won't make long term investment and the value of the company will not increase. The amount of risk taken to maintain profit is less than to increase wealth. Wealth cannot go hand in hand with profit maximization. They are two different poles. If you try for wealth maximization , then you need to spend money and if you want to maximize profit, then take less risk and spend lesser. Therefore a firm should either choose to maximize profit or maximize wealth. Hence, they are mutually exclusive.