Question 1 (a)
Is wealth maximisation better than profit maximisation?
4 marks
- Time to write
- About 8 minutes
Question
Question 1 (a) · 4 marks"Wealth maximisation is a criterion better than Profit maximisation" Do you agree? Explain.
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
- agreeA statement to judge: take a stand on it in your first line, and come back to it at the end.
Write it in this order
- Read; underline the asks; jot your points 1 min
- 1 Weaknesses of profit maximisation 2 marks 3 min
- 2 Strengths of wealth maximisation; agreement and conclusion 2 marks 3 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.
Try it first. About 8 minutes for 4 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.
Yes, I agree. Wealth maximisation is the better criterion for financial decisions.
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.
Weaknesses of profit maximisation: it ignores the risk of the profits; it ignores the timing of costs and returns, and so the time value of money; it ignores how a decision is financed and the risk of that financing; and "profit" is vague (short-term or long-term, before or after tax). The DU text therefore finds it unsuitable as an operational objective.
Strengths of wealth maximisation: it values a decision at the present value of its cash flows, discounted at a rate reflecting their risk and timing, so it deals with every weakness above; it rests on cash flows rather than accounting profit; and its result is visible in the market price of the share.
Conclusion. Profit is a necessary measure of efficiency, but as a guide to choosing between financial alternatives wealth maximisation is better, because it accounts for the amount, timing and risk of the benefits to shareholders.
Where the 4 marks sit
| # | Component | Marks |
|---|---|---|
| 1 | Weaknesses of profit maximisation | 2 |
| 2 | Strengths of wealth maximisation; agreement and conclusion | 2 |
| Total | 4 |
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