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A of an organization should be profit oriented.

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A
corporation is seen as a legal entity that has assets and liabilities as an
individual and can be directly sued aside from its ownership. Corporate finance
therefore deals with legal financial matter of these corporations in a general
sense. However, it deal more specifically with financial investment and capital
investment decisions, maximize shareholder value, and working capital
investment decisions.

There are two
paramount objectives of corporate finance –

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i.            
Profit Maximisation

ii.          
Wealth Maximisation

 

i.            
Profit Maximisation –

 

Profit Maximisation is the
capability of the firm in producing maximum output with the limited input, or
it uses minimum input for producing stated output. It is considered as one of
the important goal in financial decision making of an organization.

 

It is traditionally recommended
as the prime motive of any business organization to earn profit in a limited
period which is essential for success, growth and survival of a company. But in
recent years, profit maximization is considered as very unrealistic, risky,
difficult, immoral and inappropriate for the business.

 

The main goal of profit
maximization implies that the investment, financing and dividend decisions of
an organization should be profit oriented.

 

·        
Advantages

 

a)      Easy
to calculate profits

b)     Easy
to determine link between financial decisions and profits.

c)      Emphasis
is on large amount of profits.

d)     Efficient
allocation of resources.

e)      Optimum
utilization.

 

 

 

 

·        
Disadvantages

 

However there are many scholars who criticized
the concept of profit maximization on the following grounds –

 

a)      It
ignores time value of money.

b)     It
is vague conceptually.

c)      It
ignores risk factors.

d)     It
may cause decreasing share prices.

e)      It
emphasis is generally short term projects.

f)       It
may make such decisions for short term gain which may cause bad impact in
future.

 

ii.          
Wealth
Maximisation –

 

Wealth maximisation is the
ability of a company to increase the market value of its common stock over
time. The market value of the firm is based on many factors like their
goodwill, sales, services, quality of products, etc.

 

Fundamental objective of wealth maximisation is
to maximise the market value of the firm’s shares & those benefits are
measured in terms of cash flow.

 

It is the versatile goal of the company and highly recommended
criterion for evaluating the performance of a business organisation. The objective of wealth
maximisation refers to the shareholders’ wealth as reflected by the market
price of their shares in the share market. Hence, maximisation of wealth means
maximisation of the market price of the equity shares of the company.

 

·        
Advantages

 

a)   Emphasized the long
term plans.

b)   Recognizes risk.

c)    Recognizes the timing
of returns.

d)   Consider returns.

e)   Recognizes the value of
regular dividend payments.

f)    It maintains the market
price of its shares.

g)   It seeks growth in
sales and earnings.

h)   It considers time value
of money.

However,
profit maximisation can be a part of wealth maximisation strategy. But both the
objectives can be pursued simultaneously. But the profit maximisation should
never be permitted to overshadow the objectives of wealth maximisation.

 

·        
Disadvantages

 

a)     
Offers
no clear relationship between financial decisions and stock price.

b)    
Can
lead to management anxiety and frustration.

 

·        
Conclusion

 

Profit
maximisation is basically for a single period or short term goals which have to
achieve in the given period of time. But wealth maximisation is a long term
goal which emphasizes in future and present profits.

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