explain why maximizing profit falls short of maximizing shareholders wealth

Question

Question

Answer 1

Answer #1

Following are the reasons why maximizing profit falls short of maximizing shareholders wealth!

profit maximization objective is a very narrow objective as it focus only on current profitability
The term profit also is vague as It does not clarify what does it exactly mean. It has several forms.
profit maximization also entails higher risk because there is a direct relationship between risk and profit. There can be no higher profits without higher risks.
Also, profit maximization does not take into account the time pattern of returns. For example, project A may give higher profits as compared to project B but it starts flowing after 7 years, it may not be preferred.

Answer 2

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