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Why is wealth maximization more important than profit maximization when it comes to financial management?

1. Profits include estimates, in addition to cash flows.
2. Profits ignore time value of money.
3. Profits take into account costs.
4. Profit maximization disregards financial risk.
5. Profit includes sales amounts.

This question is part of Introduction to Financial Management
Asked by Hdtchr, Last updated: Apr 02, 2020

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4 Answers

F. Lopez

F. Lopez

Answered Sep 17, 2019

There are three correct answers to this question, which are 1. Profits include estimates, in addition to cash flows, 2. Profits ignore the time value of money, and 4, Profit maximization disregards financial risk. Financial management has many components to it. Wealth maximization and profit maximization are two of the most important parts of it.

This is because they are required for the assessment of the business and to ensure the business continues to perform well. While they are both important to financial management, wealth maximization is more important. Profit maximization only increases the capacity of earning, while wealth maximization increases the stock market value.

 

J. Shatner

J. Shatner, Content writer, Boston

Answered Jul 19, 2018

The correct answers include numbers 1, 2, and 4. What it comes down to is the fact that wealth maximization wants to increase the market value of the firm's shares. It allows stakeholders to achieve their goals. By doing so, more people have faith in the firm which drives market value up.

 

Anika Nicole

Content Writer, Teacher

Anika Nicole, Wordsmith, PG In Journalism, New York

Answered Jun 06, 2018

Both profit maximization and wealth maximization are important parts of financial management as both are necessary for business assessment and making way for sustainable performance.

There are many reasons for which health maximization is more important than profit maximization when it comes to financial management. Profit Maximization is a process used for increasing earning capacity whereas Wealth Maximization is a process that increases the value of its stock market in the market.

Profits include estimates, in addition to cash flows whereas Wealth includes only cash flows.
Profits ignore
time value of money but wealth recognizes it.
Profit maximization disregards financial risk and uncertainty whereas wealth maximization considers both.

Hence, the correct answer to this question will be option 1, 2, and 4.

 

John Smith

John Smith

Answered Dec 18, 2016

Profits include estimates, in addition to cash flows.
Profits ignore time value of money.
Profit maximization disregards financial risk.
 

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