Wealth maximization is the ability of a company to increase the market value of its common stock over time. The market value of the firm is based on many factors like their goodwill, sales, services, quality of products, etc.
It is the versatile goal of the company and highly recommended criterion for evaluating the performance of a business organization. This will help the firm to increase their share in the market, attain leadership, maintain consumer satisfaction and many other benefits are also there.
It has been universally accepted that the fundamental goal of the business enterprise is to increase the wealth of its shareholders, as they are the owners of the undertaking, and they buy the shares of the company with the expectation that it will give some return after a period. This states that the financial decisions of the firm should be taken in such a manner that will increase the Net Present Worth of the company’s profit.
The value is based on two factors:
- Rate of Earning per share
- Capitalization Rate
MERITS OF WEALTH MAXIMIZATION
- It takes care of the shareholder’s interest, lender’s or creditor’s interest, employees or workers interest.
- It focuses on achieving the long term goals of the organization.
- It takes into account the time value of money.
- It considers risk factor.
- It maintains the market price of shares of the organization.
- It recognizes the value of regular payments of dividends.
- It also ensures fair return to the shareholders building up reserves for growth and expansion, ensuring financial discipline of management. Wealth maximization involves the strategy for making sound financial investments decisions which also considers the risk factors.
- The main motive of wealth maximization is to improve the market value of its shares where as concern of profit maximization is to make large amount of profit.
- Wealth maximization involves the consideration of risks and uncertainty whereas profit maximization ignores all such factors.
- Wealth maximization involves the recognition of time pattern of return and time value of money