Wealth Maximization/ Maximize Shareholder Wealth
Why wealth max is better option than profit max?
Wealth maximization is long term process. It refers the value of the company generally expressed in the value of the stock.
Value maximization says that managers should make all decisions so as to increase the total long run market value of the firm. Total value is the sum of the value of all financial claims on the firm- including equity, debt, preferred stock and warrants.
Here, the executives undertake investing in new projects, maximizing profits from existing products and services, controlling cost, and adding value to the company through process, which reflects in the price of the stock, but always in the increase in Net Asset Value and Equity Per Share.
The wealth of corporate owners is measured by the share price of the stock, which in turn is based on the timing of returns (cash flows), their magnitude and their risk. Maximizing share price will maximize owner wealth.
Cash flow and risk are the key decision variables in maximizing owner wealth.
When investors look at a company they not only look at dollar profit but also profit margins, return on capital, and other indicators of efficiency. Profit maximization does not achieve the objectives of the firm’s owners; therefore wealth maximization is better option than profit maximization.