Question

Why is profit maximization, by itself, an inappropriate goal? What is meant by the goal of maximization of shareholder wealth?

Short answer

Profit maximization is an inappropriate goal as it is a short-term goal. Shareholder wealth maximization means increasing the business value by increasing the value of shares.

Step-by-step solution

The inappropriateness of profit maximization goal

The goal of profit maximization is an inappropriate goal as it only considers the objective of generatinga profit and other factors are ignored. This goal is short-term in nature and does not consider the long-term benefits of value maximization to the company.

Shareholder wealth maximization

Shareholder wealth maximization means the goal of increasing the value of shares which will, in turn, increase the value of the business. This goal motivates the company to increase its profits for providing high dividends to the shareholders and increasing the owners’ profits.