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Profit Maximization vs. Value Maximization

This document discusses the differences between profit maximization and value maximization as objectives for businesses. While profit maximization focuses on short-term gains, value maximization prioritizes timing of cash flows, reducing risk, increasing market share and shareholder satisfaction to ensure long-term success. While businesses need profits, purely pursuing profits ignores risks, so value maximization which considers multiple factors is a better strategy for most firms to perform well financially and maintain shareholder support over the long run.

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Nikoleta Trudov
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46 views

Profit Maximization vs. Value Maximization

This document discusses the differences between profit maximization and value maximization as objectives for businesses. While profit maximization focuses on short-term gains, value maximization prioritizes timing of cash flows, reducing risk, increasing market share and shareholder satisfaction to ensure long-term success. While businesses need profits, purely pursuing profits ignores risks, so value maximization which considers multiple factors is a better strategy for most firms to perform well financially and maintain shareholder support over the long run.

Uploaded by

Nikoleta Trudov
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Profit maximization vs.

Value maximization

Among the paramount objectives of any enterprise are its profit maximization and wealth maximization.
Even if for a good functioning of the entity they must intersect at one moment in time, there is always a
disagreement regarding which one of them is more important.
Conventionally it is considered that the goal of any firm is to earn profit, which will guarantee its
survival, success and development. However, the risk is proportional to the amount of profit: the higher
risks the company undertakes, the higher profits it may earn (therefore this approach ignores the risks).
Also here appears the uncertainty and timing of future returns. Thats why profit maximization is
considered to be a long-term objective, but with a short-term perspective, and a firm cannot depend only
on this objective.
On the other hand, timing, cash flows, and risk are the key decisions variables in value maximization: the
earlier the return is received - the better, since a quick return reduces the uncertainty about receiving the
return, and the money received can be reinvested sooner. This approach supposes that the company
shouldnt be concerned only on obtaining a big amount of profit from its activity, but also needs to
increase its share on the market and maintain shareholders satisfaction, benefits that will guarantee the
success in the long-run. A big share on the market will attract new investments, which will generate in the
future higher cash flows (and profit), because stockholders invest their money in a firm with the hope of
getting back high returns, otherwise will invest somewhere else.
To conclude, I can affirm that profit maximization is not sufficient for most firms today and they try to
concentrate on value maximization, as this strategy ensures a more stable, greater market share, better
financial market performance and more financial benefits for shareholders in the long run.

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