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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 the profit maximisation objective as a goal of financial management?

The profit maximisation objective ignores the risk attached to expected profits, which is a standard limitation. It also overlooks timing of returns and relies on accounting profit rather than cash flows, so it cannot reliably measure the increase in shareholders' wealth.

  1. AIt considers the time value of money and the timing of returns
  2. BIt ignores the risk associated with expected profitsCorrect
  3. CIt is based on cash flows rather than accounting profits
  4. DIt always results in an increase in shareholders' wealth per share

Explanation

Profit maximisation uses accounting profit, ignores the timing of benefits, and does not account for risk of earnings. Hence option B is the limitation. Options A and C describe features of wealth maximisation, not profit maximisation, and D is not true because profits can rise while per share wealth falls.

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