The ultimate criterion for an organization's marketing success is that
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Thus, value maximisation of a firm implies maximisation of shareholder’s wealth. Therefore, this model is also known as “shareholders wealth maximisation model”.
Thus modern managerial economics departs from the traditional economic theory in which it is assumed that managers of corporate firms or owner-managers of self-owned business enterprises seek to maximise short-run profits. It has often been observed that firms sacrifice some short-run profits for the sake of higher profits in the future years.
That is, they aim at maximising long-run profits. It is because of this objective that business enterprises incur huge expenditure on research and development, new capital equipment and expensive promotional schemes for their products. Therefore, incorporation of time in the analysis of decision making by managers of business enterprises is essential. Modern theory of the firm assumes that primary objective of the firm or their managers are to maximise value of wealth or shareholder’s wealth.
1. Value Maximisation Model:
Value of the firm is measured by calculating present value of cost flows of profits of the firm over a number of years in the future. To do so profits of future years must be discounted because money value a rupee of profit in a future year is worth less than a rupee of profit in the present. Therefore, the value of the firm or shareholder’s wealth is given by the present value of all expected future profits of the firm.