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

Which of the following is a recognised limitation of profit maximisation as the objective of financial management?

Profit maximisation ignores the time value of money and the risk attached to expected earnings, so it cannot distinguish early from late or certain from uncertain profits. Market value focus and discounting of cash flows are features of wealth maximisation, and profit can be quantified.

  1. AIt ignores the time value of money and the risk associated with expected earningsCorrect
  2. BIt cannot be expressed in quantitative terms
  3. CIt focuses on the market value of equity shares over the long term
  4. DIt considers the timing of cash flows using discounting

Explanation

Profit maximisation is criticised because it is vague (which profit?), ignores the timing of returns (time value of money) and ignores risk. It is quantifiable, so the claim that it cannot be quantified is wrong. Market value focus and discounting belong to wealth maximisation.

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