Wealth maximization decision criterion


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Wealth maximization decision criterion:

This is also known as value maximization or net present worth maximization. The focus of financial management is on the value to the owners or suppliers of equity capital. The wealth of the owners is reflected in the market value of the shares. So wealth maximisation implies the maximisation of the market price of shares. It has been universally accepted as an appropriate operational decision criterion for financial management decisions as it removes the technical limitations, which characterise the earlier profit maximisation criterion. Its operational features satisfy all the three requirements of a suitable operational objective of financial courses of action, namely exactness, quality of benefits and the time value of money.

 

Despite the forceful arguments in favour of the goal of maximising shareholder value its supremacy has been challenged by many. They are as follows:

Maximisation of the wealth of shareholders (as reflected in the market value of equity) appears to be the most appropriate goal for financial decision-making.


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