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Discusses the goal of the firm. Should the firm maximize shareholder wealth? Maximize profit? Does profit...

Discusses the goal of the firm. Should the firm maximize shareholder wealth? Maximize profit? Does profit maximization lead to the highest possible share price?

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Answer #1

The firm should aim for wealth maximisation of shareholders and not just aim for profit maximisation. the goal of the firm should not be to maximise profits, without thinking about the long term consequences of the actions on the performance of the company.

The goal of profit maximisation is to ficus on the short term goals of the firm , while the goal of wealth maximisation is to increase the overall value of the firm. Wealth maximisation over time, increases the market value of the shares . The ultimate objective of wealth maximisation is to generate maximum profits for the investors /shareholders in the form of dividends and increase in the value of the shares.

So, not profit but wealth maximisation leads to the highest share price overt he long run.

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