Criticism of profit maximization approach, Financial Management

Assignment Help:

Criticism of Profit Maximization Approach:

(i) Ambiguous: - One practical complexity with this approach is that the term profit is ambiguous. Different people take dissimilar meaning of term profit. For illustration:

  • Profit may be short-term or long-term.
  • Profit may be before tax or after tax.
  • Profit may be total profit or rate of profit.
  • Profit may be return on total capital employed or total assets or shareholders funds.

(ii) Ignores the Time Value of Money: - This approach disregard the time value of money. It doesn't make a distinction between profits earned over the different years. It ignores the fact that the worth of one rupee at present is greater than the value of same rupee received after one year.

(iii)Ignores Risk Factor: - This schema ignores the risk associated with the earnings. If the two firms have the entirety expected earnings however if earnings of one firm fluctuate considerably as compared to the other it will be more risky. It is therefore clear that profit maximization criterion is inappropriate and inappropriate. It isn't only ambiguous but fails to solve the problems of time value of money and the risk. An substitute to profit maximization which solves these problems is the criterion of wealth maximization.


Related Discussions:- Criticism of profit maximization approach

Define that an option is in-, What is meant by the terms that an option is ...

What is meant by the terms that an option is in-, at-, or out-of-the-money? Answer:  A call or put option with S t > E (E > S t ) is considered to as trading in-the-money.  If

Explain about book value weights, Q. Explain about Book Value Weights? ...

Q. Explain about Book Value Weights? Book Value Weights: - Book value weights are calculating form the values taken from the balance sheet. The weight to be assigned to every s

State the meaning ofunlimited profit sharing, State the meaning ofUnlimited...

State the meaning ofUnlimited profit sharing Unlimited profit sharing means that equity shares have an unlimited potential for dividend payments and price appreciation. Which i

Interest rate parity, QUESTION 1 (a) What are the differences between f...

QUESTION 1 (a) What are the differences between futures and forwards? (b) Clearly explain the following position on options i) Going long on a call option ii) Going lo

Evaluate optimum price of the new machine, Q. Evaluate optimum price of the...

Q. Evaluate optimum price of the new machine? The optimum price will be the one which optimises total contribution over the five-year life of the new machine. Sales price o

Explain about the financial risk, Explain about the Financial risk fina...

Explain about the Financial risk financial risk are presumed to be constant, changing cost of each type of capital, j, over time must be affected only by changes in the supply

What are the major sections of the statement of cash flows, What are the ma...

What are the major sections of the statement of cash flows? a.Cash flows from Operations b.Cash flows from investing activities c.Cash flows from financing activities

Maturity profile, Maturity Profile Even though there is no ideal theory...

Maturity Profile Even though there is no ideal theory/concept of the maturity of the instruments, some important issues that should be considered while balancing the long-term

Certified management accountant, Q. Certified Management Accountant? Ce...

Q. Certified Management Accountant? Certified Management Accountant (CMA) - An accreditation conversed by the Institute of Management Accountants which indicates the designee h

Analytical way of viewing financial problems of a firm, Analytical way of v...

Analytical way of viewing financial problems of a firm The new approach is an analytical way of viewing financial problems of a firm. The main contents of this tactic are what

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd