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Profit maximization vs Value maximization

An economic organization defines its financial objectives by the


possibilities and growing potential they can reach. Financial
management is responsible for setting these goals and achieving them.
There are two main aims every company aspires to achieve:
maximization of profit or value. It is a huge difference between these
two types of maximizations, due to the factors and effects involved.
First, Profit maximization is a short-term (SR) objective that
assures the growth of the capital, but it neglects risk and uncertainty
the company can pass-through in the future. Profit maximization gives
an immediate result, and, in different situations, it can save the firm
from debts, problems and financial crisis. It is a well-known fact that the
highest amount of profit is obtained when MC=MR. This means that a
firm does everything to reduce production costs, increase sales volume,
and set an optimal price-level for achieving these steps.
Second, Value maximization is a long-term (LR) objective that
undertakes safe actions in order to increase the market value of its
common stock over time. The market value of the firm is based on
many factors, like their sales, services, quality of products, profit.
Wealth maximization considers both risk and uncertainty. These mean
that long-term goals recognize time value of money, accelerating the
growth rate of the enterprise and aiming to attain maximum market
share of the economy. Moreover, Value maximization is highly
recommended criterion in evaluating the performance of a business
organization. This will help the firm to increase their share in the
market, attain leadership, maintain consumer satisfaction. Shareholders
are more interested in value maximization because of the stability it
brings, economic attraction, constant profit based on dividends.
In Conclusion, I can say that these two financial objectives bring
different results; therefore, using one of them depends on situation. In
my humble opinion Wealth maximization, being a long-run goal,
involves the profit increasing processes, moreover, an attractive
organization with a high market value cannot accept a low profit level.
Profit is the basic requirement of any entity, otherwise, it will lose its
capital and cannot be able to survive in the long run. Shareholders are
investing their money in the company with the hope of getting good
returns and if they see that nothing is done to increase their wealth,
they will invest somewhere else. Profit Maximization can be taken into
consideration as a quick, short-run decision, but when it comes to
decisions that will directly affect the interest of the shareholders, then
Wealth Maximization should be exclusively considered.