Answer to Question #230252 in Finance for Louis Ag

Question

Question 1
It is generally argued that the corporate objective of shareholder wealth maximization should override that of profit maximization. Distinguish these objectives and explain why wealth maximization should take precedence over profit maximization. (10 marks)

Answer 1

In general, profit accretion tends to be wealth accretion, but in other cases particularly the ones that involves the change of tax policy, the linkage is normally broken.

For instance, in a cases where tax policy tends to limit profit more that respective threshold to a tune of taxes above 100 percent of the profit. In this case, corporate objective needs to be wealth maximization of shareholders rather than profit maximization.