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Wealth Maximization

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natalie clyde mates
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38 views

Wealth Maximization

Uploaded by

natalie clyde mates
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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WEALTH

MAXIMIZATION
2

1.
Definition
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Wealth Maximization
⊸ Maximization of shareholder’s
wealth
⊸ A wealth of a shareholder
maximizes when the net worth of
a company maximizes.
⊸ Also known as net worth
maximization.
⊸ Modern approach
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2 Main Source of
Wealth Creation

⊸ Industry
Attractiveness

⊸ Competitive
Advantage
5

Industry Attractiveness

1. Barriers to Competitor’s Entry


2. Substitutes
3. Bargaining Power of Buyers
4. Bargaining Power of Suppliers
5. Competition among Competitors
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Competitive Advantage

1. Cost Advantage
2. Differentiation
Advantage
2.
Profit
Maximization vs
Wealth
Maximization
8

Profit Maximization Wealth Maximization

Achieve highest
Earn large amount of
amount of market value
profit
of common stock

Short-term Long-term

Ignores time value of Considers time value of


money money
Ignores risk and Recognizes risk and
uncertainty uncertainty
Recognizes timing of
Ignores timing of return
return
3. Arguments
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Favorable Arguments
⊸ Wealth maximization is superior to the profit
maximization
⊸ Wealth maximization considers the comparison of the
value to cost associated with the business concern.
⊸ Wealth maximization considers both time and risk of the
business concern.
⊸ Wealth maximization provides efficient allocation of
resources.
⊸ It ensures the economic interest of the society.
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Unfavorable Arguments

⊸ WM is nothing, it is also profit maximization, it


is the indirect name of the profit maximization.
⊸ WM creates ownership-management
controversy.
⊸ Management alone enjoy certain benefits, and
the ultimate aim of the wealth maximization.
⊸ WM can be activated only with the help of the
profitable position of the business concern.
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