Question

as mentioned in chapter 1, when making financial decisions (such as decisions relating to what investments to make and how to finance them), managers should choose the decision that maximizes owners' wealth. The book stresses that managers should target owner's' wealth maximization rather than profit maximization.

Answer 1

Answer:

The main difference between profit maximization and wealth maximization is that the profit maximization is looking for short term advantages whereas the wealth maximization talks about the long term success of the enterprise and also discusses about trading ethically.

This can be illustrated by the example that the managers can sell a machinery for $16000 which they purchased for $15000 5 years ago. This means the manager has increased the wealth of the shareholders by considerable. But after sale the procurement manager said that it was our mistake to sell that machinery because new machinery will cost us $50000 and will take 3 months to receive that asset. So long term success (Wealth Maximization) is associated with long term plannings not with thinking short term (Profit Maximization).