Scribd
Upload
12 views

Case Study - PM Vs WM

Uploaded by

Dr. Shuchita Singh
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
12 views

Case Study - PM Vs WM

Uploaded by

Dr. Shuchita Singh
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
You are on page 1/ 2

In the world of business, financial management reigns supreme.

But what's the ultimate goal


of all this financial maneuvering? Traditionally, the answer was simple: profit maximization.
Every business needs to turn a profit to survive, right? It provides a buffer against risks,
unexpected losses, and market fluctuations.
However, the profit maximization model has its fair share of critics. Here's why:
 The Moving Target of Profit: What exactly constitutes "profit"? Short-term gains or
long-term sustainability? Earnings per share (EPS) or total profit? Profit maximization
can lead to a focus on short-term gains at the expense of long-term health.
 Time Value of Money Overlooked: A dollar today is worth more than a dollar
tomorrow. Profit maximization often treats all earnings equally, regardless of when
they occur.
 Risk Factor Forgotten: Not all projects carry the same level of risk. Profit
maximization might prioritize immediate gains over long-term stability.
 Shareholder Focus vs. Stakeholder Neglect: A relentless pursuit of profit can come
at the cost of employee well-being, customer satisfaction, and even ethical practices.
These limitations paved the way for a new approach: wealth maximization. This philosophy
goes beyond just maximizing profits. It aims to increase shareholder wealth and overall
business value by considering multiple factors:
 Investing in People: Providing proper training for employees and fostering a positive
work environment leads to increased productivity and customer satisfaction.
 Building Goodwill: Strong brand reputation attracts loyal customers and strengthens
market position.
Wealth maximization embraces a long-term perspective, focusing on the sustainable
growth of the company. It acknowledges the importance of:
 Dividend Policy: Distributing profits to shareholders can positively impact stock
price.
 Risk Management: Making decisions that consider potential risks and ensure long-
term profitability.
 Present Value of Money: Taking into account the time value of future earnings.
So, how do we measure shareholder wealth creation? Here are two key metrics:
 Economic Value Added (EVA): This metric goes beyond traditional profit measures.
It calculates the surplus profit generated by an investment, considering the cost of
capital. A positive EVA indicates that the company is creating value for shareholders.
 Market Value Added (MVA): This metric takes a broader view. It represents the
difference between the current market value of the firm (including debt and equity)
and the book value of its capital. A positive MVA signifies that the market recognizes
the company's ability to create future value.
Case Questions
1. What are the problems highlighted with the Profit Maximization Approach and how
the problems are plugged using Wealth Maximization Approach (5 Marks) (CO1)
2. In light of Given case study how do you summarize the entire debate between Profit
Maximization vs Wealth Maximization (5 Marks) (CO1)
Source:
(20) The Great Debate: Profit vs. Wealth Maximization for Shareholders | LinkedIn

Solution to Case Questions


Answer-1
Problems of Profit Maximization Approach
 The Moving Target of Profit: What exactly constitutes "profit"? Short-term gains or
long-term sustainability? Earnings per share (EPS) or total profit? Profit maximization
can lead to a focus on short-term gains at the expense of long-term health.
 Time Value of Money Overlooked: A dollar today is worth more than a dollar
tomorrow. Profit maximization often treats all earnings equally, regardless of when
they occur.
 Risk Factor Forgotten: Not all projects carry the same level of risk. Profit
maximization might prioritize immediate gains over long-term stability.
 Shareholder Focus vs. Stakeholder Neglect: A relentless pursuit of profit can come
at the cost of employee well-being, customer satisfaction, and even ethical practices.
Benefits of Wealth Maximization Approach
Wealth maximization embraces a long-term perspective, focusing on the sustainable
growth of the company. It acknowledges the importance of:
 Dividend Policy: Distributing profits to shareholders can positively impact stock
price.
 Risk Management: Making decisions that consider potential risks and ensure long-
term profitability.
 Present Value of Money: Taking into account the time value of future earnings.
Answer-2
The Bottom Line:
The debate between profit maximization and wealth maximization highlights the
complexities of financial management. While profit is essential, it's just one piece of the
puzzle. By focusing on creating long-term value for shareholders and stakeholders alike,
businesses can achieve sustainable success.

You might also like