Q: Compare the following goals and Explain why wealth maximization is chosen by the firms?

Profit Maximization Earnings Per Share Wealth Maximization

1. Profit Maximization : Profit maximization is a process by which a firm determines the price and output level that returns the greatest profit after paying off all the taxes. Primary focus is on profits. It could increase current profits while harming firm and ignore changes in the risk level of the firm.

2. Earnings Per Share :It is the profit which is allocated to every outstanding share of a common stock of an organization. Its formula is the company’s profit per share divided by the number of outstanding shares that a company has.It is very useful in measuring company performance and profitability in future. It does not specify timing or duration of expected returns. It also ignore changes in the risk level of the firm as in the profit maximization. It calls for a Zero payout dividend policy.

3. Wealth Maximization :A process that increases the current net value of business or shareholder capital gains and bring the highest possible return. The wealth maximization strategy generally involves financial investment decision. Stockholder wealth maximization is a long-term goal, since stockholders are interested in the future as well as present profits. The main aim is to ensure the highest market value of the entities ordinary shares. Wealth maximization is also known as Value Maximization.

Reason of choosing wealth maximization: It can be clearly seen that though all objectives of the firm, shareholder wealth maximization embodies all objectives of the firm and while profit maximization and earning per share are for the short run, shareholder wealth maximization is for the long run. So the wealth maximization is chosen by the firms as their goal.