Abrera, Zoram F.

BS-AIS
ACT-202

In this assignment, I have been tasked to explain the difference between Profit
maximization and Shareholder wealth maximization. But, in order to know the difference
between both. I will elaborate the definitions of both maximizations. The first one is Profit
maximization. It is said that the Profit maximization is assumed to be the dominant goal of a
typical firm. This means selling a quantity of a good or service, or fixing a price, where total
revenue (TR) is at its greatest above total cost (TC). Secondly, the Shareholder wealth
maximization, it proposes that a business concern should only consider the decisions
that maximize the market value of the share or the shareholders' wealth. When the firm
maximizes the shareholders' wealth, the individual shareholder can use
this wealth to maximize his individual utility. What is their difference? The essential difference
between the maximization of profits and the maximization of wealth is that the profits focus
is on short-term earnings, while the wealth focus is on increasing the overall value of the
business entity over time. These differences are substantial. Planning duration. Under profit
maximization, the immediate increase of profits is paramount, so management may elect not
to pay for discretionary expenses, such as advertising, research, and maintenance. Under
wealth maximization, management always pays for these discretionary expenditures. Risk
management. Under profit maximization, management minimizes expenditures, so it is less
likely to pay for hedges that could reduce the organization's risk profile. A wealth-focused
company would work on risk mitigation, so its risk of loss is reduced. Pricing strategy.
When management wants to maximize profits, it prices products as high as possible in order
to increase margins. A wealth-oriented company could do the reverse, electing to reduce
prices in order to build market share over the long term. Capacity planning. A profit-
oriented business will spend just enough on its productive capacity to handle the existing
sales level and perhaps the short-term sales forecast. A wealth-oriented business will spend
more heavily on capacity in order to meet its long-term sales projections. It should be
apparent from the preceding discussion that profit maximization is a strictly short-term
approach to managing a business, which could be damaging over the long term. Wealth
maximization focuses attention on the long term, requiring a larger investment and lower
short-term profits, but with a long-term payoff that increases the value of the business.
These are the differences between Profit maximization and Shareholder wealth
maximization.
Here are my references for my answer:
Profit Maximization
https://www.economicsonline.co.uk/Definitions/Profit_maximisation.html
Shareholder Wealth Maximization
https://www.researchgate.net/publication/
331465338_Shareholders_Wealth_Maximization_Objective_of_Financial_Management_Revisit
ed#:~:text=Shareholders%20wealth%20maximization%20criterion%20proposes,share%20or
%20the%20shareholders'%20wealth.&text=When%20the%20firm%20maximizes%20the,to
%20maximize%20his%20individual%20utility.
The Difference between Profit Maximization and Shareholder Wealth Maximization
https://www.accountingtools.com/articles/profit-maximization-vs-wealth-
maximization.html#:~:text=The%20essential%20difference%20between%20the,the%20business
%20entity%20over%20time.