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

Which of the following is a key limitation of profit maximisation as the objective of financial management, which wealth maximisation overcomes?

Profit maximisation ignores the timing of returns and the time value of money, treating a rupee earned today the same as one earned years later. It also disregards risk. Wealth maximisation corrects this by using discounted cash flows that reflect both timing and risk.

  1. AIt ignores the timing of returns and the time value of moneyCorrect
  2. BIt focuses on cash flows rather than accounting profit
  3. CIt considers risk and uncertainty of returns explicitly
  4. DIt measures long-term value in terms of market price of shares

Explanation

Profit maximisation treats profits earned in different years as equal, ignoring time value of money, and also ignores risk and quality of earnings. Options considering risk, cash flows and market value describe features of wealth maximisation, not limitations of profit maximisation.

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