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By Thomas Morva

When talking about investment management firms, it is very important to understand profit maximization and wealth maximization. According to the objective of profit maximization, the ultimate goal of a business enterprise is to maximize its profits. All the efforts of the organization are to be directed to achieve this goal. The profit maximization objective is justified, as business is conducted for earning profit. When profit earning is the aim of the business, profit maximization should be the obvious objective. Profitability is an indicator of the efficiency with which the firm is managed. The higher the profit, the better the efficiency. For growth and expansion, profit is the main source of finance. To meet unforeseen contingencies reserves are necessary, which is possible only if there is enough profit.

However, the profit maximization objective is objected to on some grounds. The term profit is vague. It may assume different meaning in different contexts. It may be short-term or long-term. The concept of profit maximization generally ignores the time value of money. All profit gained in different time periods are taken together. The risk involved in any given project and the uncertainty of return are not at all considered. Accounting bias influences profit.

On the other hand, according to the objective of wealth maximization the ultimate goal of a business enterprise is to maximize the wealth of the shareholders, which is represented by the market value of the shares of the firm. Wealth is defined as the net present worth of the firm, i.e., the present value of all future returns.

Though the wealth maximization objective seems superior to the profit maximization objective, it is to be noted that the former is based upon the latter. The market price of shares, which is the indicator of the wealth of the firm, is based on the long-term returns of the firm. The returns that accrue to the investor would be a function of the earnings of the company. Thus it can be said that these objectives are not competing.

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