conflicting goals in a firm
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The performance of the basic financial management functions leaves the financial manager with two conflicting objectives which must be achieved. Such objectives includes maximizing profits for the owners of the business and maximizing the wealth of the owners.
Wealth maximization considers the owners' realizable returns which may be in form of dividends or capital appreciation. At any point in time, the owners wealth should be measured by the market price of his shares and not necessarily by the amount of periodic profits. Profits on the other hand may be high whereas the price of the share in the market may be low.
Wealth considers the long-run approach whereas profit maximization gives a short run consideration. This is to say that wealth relates to the price and shares of the company in the stock exchange bearing the future in mind. In profit maximization, the manager may make decisions that will yield the greatest profit for the next two years without considering the years ahead of the two years.
Profit maximization does not give much consideration to risk but wealth maximization gives explicit consideration to differences in risk. A basic premise of financial management is that a trade-off exists between risk and return. This means that shareholders expect to receive higher returns from investment of higher risks and vice versa. This assumption however does not hold at all times.
Profit maximization approach implies that all the firms profit should be re-invested to maximize future profits. The wealth maximization approach recognizes that some shareholders prefer to receive periodic dividend payments.
Wealth maximization considers the owners' realizable returns which may be in form of dividends or capital appreciation. At any point in time, the owners wealth should be measured by the market price of his shares and not necessarily by the amount of periodic profits. Profits on the other hand may be high whereas the price of the share in the market may be low.
Wealth considers the long-run approach whereas profit maximization gives a short run consideration. This is to say that wealth relates to the price and shares of the company in the stock exchange bearing the future in mind. In profit maximization, the manager may make decisions that will yield the greatest profit for the next two years without considering the years ahead of the two years.
Profit maximization does not give much consideration to risk but wealth maximization gives explicit consideration to differences in risk. A basic premise of financial management is that a trade-off exists between risk and return. This means that shareholders expect to receive higher returns from investment of higher risks and vice versa. This assumption however does not hold at all times.
Profit maximization approach implies that all the firms profit should be re-invested to maximize future profits. The wealth maximization approach recognizes that some shareholders prefer to receive periodic dividend payments.
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