Question 1 OR (a)
Profit maximisation and wealth maximisation
5 marks
- Time to write
- About 10 minutes
Question
Question 1 OR (a) · 5 marksExplain the goals of Profit maximisation and Wealth maximisation. In your opinion, which of these is more effective for financial decision-making?
Reworded from the university paper; the task is the same. The original paper belongs to the University of Delhi. See DU's question bank.
Before you write
Read off the question and its marks
Read from the question
- Explain…Which…?Two asks in one question: answer both.
Write it in this order
- Read; underline the asks; jot your points 1 min
- 1 Profit maximisation and its weaknesses 2 marks 3 min
- 2 Wealth maximisation 2 marks 3 min
- 3 Opinion with reasons 1 mark 2 min
- Check: every ask answered, key terms underlined 1 min
Short on time? Trim steps 1 and 2 evenly rather than skip one: each is capped at its own marks. End with step 3 in a line or two.
Try it first. About 10 minutes for 5 marks. Write it out, then open the solution.
Solution
Hover or tap a marked figure, like 72,000, to see how it is made and where else it appears.
Profit maximisation. The firm takes the decisions that raise its profit. As an operational guide it has four weaknesses: it ignores risk, accepting every profitable opportunity whatever its risk; it ignores how a decision is financed and the risk of that financing; it ignores the timing of costs and returns, and so the time value of money; and "profit" is vague (short-term or long-term, before or after tax).
1Quick cash today: the deal is struck even as the godown behind them crumbles.
Weaknesses of profit maximisationIt ignores the risk of the profits; it ignores the timing of costs and returns.
2Asha weighs time against risk on the scale—and the share price curve climbs behind her.
Strengths of wealth maximisationIts result is visible in the market price of the share.
Wealth maximisation. The firm takes the decisions that raise the present value of the benefits to shareholders, as shown in the market price of the share. A decision is valued by the present value of its cash flows, discounted at a rate that reflects their risk and timing.
Which is more effective. Wealth maximisation. It is based on cash flows, which are definite, and it takes account of both the timing and the risk of the benefits through discounting; it gives a precise, measurable target, the share price. Profit maximisation remains a useful measure of efficiency, but the DU text finds it unsuitable as an operational objective of financial management.
Where the 5 marks sit
| # | Component | Marks |
|---|---|---|
| 1 | Profit maximisation and its weaknesses | 2 |
| 2 | Wealth maximisation | 2 |
| 3 | Opinion with reasons | 1 |
| Total | 5 |
Report a problemopens an email to admin@getkunji.com with the question ID874-Q1ORaalready filled in.