Skip to content

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 a firm, as compared with wealth maximisation?

Profit maximisation ignores the timing of returns and thus the time value of money, besides ignoring risk and being based on accounting profit. The remaining options describe strengths of wealth maximisation, which discounts cash flows at a risk-adjusted rate and focuses on long-term shareholder value.

  1. AIt ignores the timing of returns and the time value of moneyCorrect
  2. BIt accounts for risk by discounting cash flows at a risk-adjusted rate
  3. CIt focuses on cash flows available to shareholders over the long term
  4. DIt measures the increase in market price of shares directly

Explanation

Profit maximisation uses accounting profit for a period and ignores when benefits arrive, so it disregards the time value of money. It also ignores risk. The other three options describe features of wealth maximisation, not limitations of profit maximisation.

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