Wealth Maximization vs Profit Maximization

Profit Maximization vs. Wealth Maximization

The objective of the firm is to maximize its value to its shareholders. Value is represented by the market price of the company’s common stock, which, in turn, is a reflection of the firm’s investment, financing, and dividend decisions.

The idea of wealth maximization involves increasing the Earning per share of the shareholders and to maximize the net present worth.
Wealth is equal to the the difference between gross present worth of some decision or course of action and the investment required to achieve the expected benefits.

Gross present worth involves the capitalised value of the expected benefits.This value is discounted a some rate,this rate depends on the certainty or uncertainty factor of the expected benefits.

The Wealth Maximization approach is concerned with the amount of cash flow generated by a course of action rather than the profits.

Any course of action that has Net Present Value above zero or in other words,creates wealth should be selected.

Frequently, maximization of profits is regarded as the proper objective of the firm, but it is not as inclusive a goal as that of maximizing shareholder wealth. For one thing, total profits are not as important as earnings per share. A firm could always raise total profits by issuing stock and using the proceeds to invest in Treasury bills. Even maximization of earnings per share, however, is not a fully appropriate objective, partly because it does not specify the timing or duration of expected returns. Is the investment project that will produce $100,000 return 5 years from now more valuable than the project that will produce annual returns of $15,000 in each of the next 5 years? An answer to this question depends upon the time value of money to the firm and to investors at the margin. Few existing stockholders would think favorably of a project that promised its first return in 100 years. We must take into account the time pattern of returns in our analysis.

Another shortcoming of the objective of maximizing earnings per share is that it does not consider the risk or uncertainty of the prospective earnings stream. Some investment projects are far more risky than others. As a result, the prospective stream of earnings per share would be more uncertain if these projects were undertaken. In addition, a company will be more or less risky depending upon the amount of debt in relation to equity in its capital structure. This risk is known as financial risk; and it, too, contributes to the uncertainty of the prospective stream of earnings per share. Two companies may have the same expected future earnings per share, but if the earnings stream of one is subject to considerably more uncertainty than the earnings stream of the other, the market price per share of its stock may be less.

For the reasons above, an objective of maximizing earnings per share may not be the same as maximizing market price per share. The market price of a firm’s stock represents the focal judgment of all market participants as to what the value is of the particular firm. It takes into account present and prospective future earnings per share, the timing, duration, and risk of these earnings, and any other factors that bear upon the market price of stock. The market price serves as a performance index or report card of the firm’s progress; it indicates how well management is doing in behalf of its stockholders.

Maximize Your Savings

Wealth can be maximized not only by intelligent investment decisions but also by maximizing your savings. If you earn more and spend the same the result will be no addition to your wealth. Here are some tips to maximize your savings.

Use common sense

Don't let rebates or coupons talk you into buying things that you wouldn't otherwise spend money on. "It always comes down to whether you need the purchase, of course. Don't go shopping just because you have a 25 % off coupon, you'll save 75 % by staying home,"

Use rebates wisely

"$50 rebate! Only $24.99 after mail-in rebate!" This is the kind of advertising that sucks us right in, particularly when it comes to big budget items. Rebates can, and often do, mean a great deal, but that's only if you use them. Too often, we buy a product based on the after-rebate price, then lose our receipt, miss the deadline, or forget about the rebate altogether. That's why if you're banking on a rebate you have to deal with the paperwork as soon as absolutely possible. Make photocopies of the documentation they require, and send in the originals via certified mail. Note the date that you mailed it on your calendar, and be on the lookout for plain or blank envelopes in your mailbox (many a rebate has been thrown out because it looks too much like junk mail).

Check out coupon books

I guarantee that at least one school in your town has its students selling these each year. They cost about $30 and are chock full of big deals on travel, restaurants, and entertainment in your town or city. If you don't know someone who's selling them, you can buy them at entertainmentbook.com, but here's the trick: New books tend to hit the shelves in August for the following year. If you wait until now to pick up your copy, you'll get a huge discount. Last time, they were selling for half-price, plus free shipping. If you're going on vacation this summer, for $15 it may be worth buying a book for the city that you're visiting.

Bargaining to get discount from list price.

Bargaining helps in getting discounts from list prices. It helps to increase savings. Specially if you are buying in bulk, ask for special discount. Sometimes meeting with store manager before placing the order prove more beneficial as he can offer you quantitative discounts. A lot of stores participate in what's called price-matching, meaning that if a product is on sale at a competitor, they'll sell it to you for the same price. Bring proof of the item's price at the other store (a circular will do the job) and show it to a manager, then ask for the discount. Most are authorized to give it to you, explains Nelson, who adds that she also asks retailers to honor other stores' coupons and even expired coupons with some success. Bottom line: You never know unless you ask, so give it a shot.

Search the Web for discounts

These days, "clipping coupons" is little more than an expression. Sure, your Sunday paper still offers tons of savings, particularly when it comes to department stores, but the Internet is the real jackpot. Sites like wow-coupons.com and redplum.com make it easy for you to sort by category, so you can narrow your choices down by grocery, retail, travel and restaurant deals. Just print the ones you need and if you're doing your actual shopping online, be sure to do a search for coupon codes before you submit your order, says Edgar Dworsky, founder of the consumer information site consumerworld.org. "If you go to an online site and see a field at the checkout that says 'promotional code' or 'coupon code,' that's your tip that somewhere in cyberspace, they may have coupons that will get you a percentage off of your order, or even free shipping."

Do a Google search, entering the exact phrase the company uses on its Web site, and you'll find a plethora of sites that offer codes. Granted, some of the deals may be expired, but it's well worth your time to plug a few in and see.

Think and Analyze:

Coupons are no longer limited to cereal and toothpaste, you can find them for nearly everything these days.

According to CMS, a coupon processing agent, less than 1 percent of the more than 300 billion coupons issued last year were redeemed. When you consider that the average value of each, it was a lot of savings that we as consumers passed up. Rebate, too, represent a lot of lost value. According to Consumers Union 40 percent are never claimed.

"I use coupons for everything, including the parking lot at the airport. I save $22 every time I travel that way," stated founder of the Web site couponmom.com, which offers links to deals and tips for maximizing your savings. Some people may find it embarrassing to pull out a coupon at the end of a meal, but trust me, your waiter has seen it before, and the savings, which can be ten or even fifteen percent, is worth it.

Seasonal Discounts

Seasonal discounts are a major source of savings. New year sales, spring sales, ester sales, christmas sales etc. can save a lot for you. If you have to buy goods that you don't need on urgent basis, waiting for such festival sales and discounts can be a major source of savings.