What is wealth maximization?

This leads us to think "What is the goal of the company "??

1- Is that  to increase the profitability ? 

2- Or it is to increase the wealth of the shareholders?

In fact, no 1 is not the ideal goal we should think about, that is because

a-  It does`t take into the considerations the amounts and timing of the cash flows coming to the company. Sometimes you may find 2 profitable projects but they did not differentiate  between their cash timing and amounts. As a results ignoring the present value of money

b- The second concern of profitability is the Risk, as usually big profits may lead us to big risk

The best alternative is to think about the increasing of the wealth of the shareholders. That is the goal that avoid all we have discussed .

Wealth maximization have already been described by the professionals. It is not a modern approach its an old approach every person wants his money should not be kept idle, it must be multiplying by some factor. This thinking can be because of so many factors, you want to be rich, want to do charitable works, welfare, helps, religious works etc.

Organizations also having same mentality but in the name of wealth maximization, for this purpose they are keeping treasury fund managers, who 24/7 think to multiply the money of an organization for various purpose e.g. attract more investors, retain existing shareholders, give good returns, expansion of business, Corporate social responsibility, diversification of business, to be a blue chip company etc.

Wealth maximization is the concept of increasing the value of a business in order to increase the value of the shares held by stockholders. The concept requires a company's management team to continually search for the highest possible returns on funds invested in the business, while mitigating any associated risk of loss. This calls for a detailed analysis of the cash flows associated with each prospective investment, as well as constant attention to the strategic direction of the organization.

The most direct evidence of wealth maximization is changes in the price of a company's shares. For example, if a company spends funds to develop valuable new intellectual property, the investment community is likely to recognize the future positive cash flows associated with this new property by bidding up the price of the company's shares. Similar reactions may occur if a business reports continuing increases in cash flow or profits.

The concept of wealth maximization has been criticized, since it tends to drive a company to take actions that are not always in the best interests of its stakeholders, such as suppliers, employees, and local communities. For example:

§  A company may minimize its investment in safety equipment in order to save cash, thereby putting workers at risk.

§  A company may continually pit suppliers against each other in the unmitigated pursuit of the lowest possible parts prices, resulting in some suppliers going out of business.

§  A company may only invest minimal amounts in pollution controls, resulting in environmental damage to the surrounding area.

Because of these types of issues, senior management may find it necessary to back away from the sole pursuit of wealth maximization, and instead pay attention to other issues, as well. The result is likely to be a modest reduction in shareholder wealth.

Given the issues noted here, wealth maximization should be considered just one of the goals that a company must attend to, rather than its only goal.

full agree with answer add by mr. tamer and mr. vinod

Why wealth maximization?

Wealth Maximization Means Maximizing the present value/wealth of a any kind of process of business. The difference of Present value & Cost from financial transaction is creat the wealth for entrepreneur/ share holder. The maximum of wealth is possible by making decission of the firm to get benefit that exceed the cost. The longer range of planning and management control that helps to maximize the profit to increase the wealth.

The main Goal of firm towards equity share holder to use the planning to increase the value of share in the market which will maximize the wealth. 

In order to wealth maximization following are the objective to increase the ratio:

1)  Return on capital employed

2) Value addition and profitability

3) Growth in earnings per share and price/ earning ratio.

4) Growth in the market value of share

5) Growth in dividend to shareholders

6) Optimum level of leverage.

7) Minimization of Finance Charges.

8) Efficient uses of Short/Medium,/Long term finances.

9) Good services to Government/ society & Country.

) CSR participation.

The wealth maximization is increase the interest of stake holder or financier to invest more money to grow the business and create a good faith among among the customer about the long life of firm.

Wealth maximisation vs Profit Maximisation-

Wealth maximisation reflects long term and strategic vision of the organisation and Profit maximisation is a short term objective of the organisation.

Wealth maximisation considers cash flow, and makes profit just a relative term. If we say that we have made a profit of X amount- it  does not say it is good performance or bad performance.  For analysing he performance we need to relate it to the cost of investment, resources,timing and mode of the profit.

In wealth maximisation due consideration is given to present value of present and future cash inflows and outflows.

One example of oil industry can explain both these terms in a better way- the recent drops in oil prices have left many industries  and countries in  slow/ shutting down mode. IF consideration has been given to wealth maximisation- funds (Example- sovereign fund) could have been invested in such a way that you have short term objective met and long term sustainability is achieved. Norway is the best example of this. UAE(to some extent)  has also succeeded in by diverting funds to other directions and not relying to much on the oil reserves. If the aim would have been Profit maximisation - crisis time will wash the entire economy. Norway's sovereign fund is an excellent example of wealth maximisation. 

In nut shell Wealth maximisation will still enable us to have sustainable profit,  relying only on profit maximisation is very risky.

Wealth maximization is a modern approach to financial management. Maximization of profit used to be the main aim of a business and financial management till the concept of wealth maximization came into being. It is a superior goal compared to profit maximization as it takes broader arena into consideration.

Thank for the invitation Mr. Tamer

you already done it briefly so I, go with you.

Agree with expert answer given by Mr. Tamer El-Beshbishy 

The theory of company finance is based on the assumption that the objective of management is to maximise the market value of the enterprise.. Specifically, the main objective of a company should be to maximise the weaith of its ordinary shareholders.

A  company is financed by ordinary shareholders, preference shareholders, loan stockholders and other long-term creditors. All surplus funds, however, belong to the legal owners of the company it shareholders. Any retained profits are undistributed wealth of these equity shareholders.

Every organization works for an aim and in current corporate world, the aim of the modern firms/companies, seeking profit, is to maximize wealth for the firm/company and ultimately for the shareholders investing their money in these firms/companies. This is the reason of the existence of the modern corporate structure.