Skip to content

CA Intermediate · Financial Management and Strategic Management · Scope and Objectives of Financial Management

A company's management announces that its primary goal is to maximise the market value of equity shares, not profit. Which of the following is a limitation of profit maximisation that supports this stance?

Profit maximisation ignores the time value of money and the risk of returns, treating profits earned at different times and with different certainty as equal. Wealth maximisation corrects this by valuing risk-adjusted cash flows over time, which is why it is the preferred objective.

  1. AIt ignores the timing of returns and the risk attached to themCorrect
  2. BIt is impossible to measure profit in rupees
  3. CIt considers only the interest of creditors
  4. DIt always leads to lower dividends

Explanation

Profit maximisation treats a rupee earned today and a rupee earned later as equal and ignores risk and uncertainty. Wealth maximisation uses discounted cash flows adjusted for risk. Profit can be measured in rupees, and the approach does not focus on creditors or imply lower dividends.

Did you get it right without looking?

One question tells you little. A timed set on Scope and Objectives of Financial Management shows your real accuracy, how long you take and where you lose marks.

Practise Scope and Objectives of Financial ManagementFree diagnostic mock

More Scope and Objectives of Financial Management questions