What are the advantages and disadvantages of Wealth Maximization?

The advantages of the goal of wealth maximization are as follows:

  1. It is a very effective and meaningful criterion to measure the performance of the company.
  2. The objective of wealth maximization is consistent with the objective of maximization of the shareholders’ economic welfare.
  3. The objective is also consistent with the objective of perpetual survival of the company and its long term profitability.
  4. It is operationally feasible and logical.
  5. It includes the motive of profit maximization as it emphasis on maximization of long term profitability and ensures maximum return on owners investment.
  6. The objectives allow for timings of profits and also consider the timings of perspective benefits.
  7. It ensures fait return on the investments, and takes into account the uncertainty of the benefit also.
  8. It offers rational guidelines for effective use of the resources available.

The disadvantages of the Goal of Wealth Maximization are:

  1. The basic assumption is that there an efficient capital market wherein the market price of the share is truly reflected. This assumption seldom holds in real practice.
  2. The market price is influenced by various economic and political factors which are difficult to anticipate and judge.
  3. The various parties having their stake in the company have conflicting interests and therefore difficult to reconcile their divergent views.

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