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

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

Profit maximisation ignores the time value of money, since it treats profits of different years as equal and also disregards risk. Wealth maximisation corrects this by using the present value of cash flows. The other options describe strengths of wealth maximisation, not weaknesses of profit maximisation.

  1. AIt considers the risk and the timing of returns
  2. BIt ignores the time value of moneyCorrect
  3. CIt focuses on the long-term cash flows to shareholders
  4. DIt is based on the net present value of cash flows

Explanation

Profit maximisation uses accounting profit and ignores when the profits arise, so it ignores the time value of money; it also ignores risk and is ambiguous. The other options describe features of wealth maximisation, not limitations of profit maximisation.

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