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ACCA Applied Knowledge · Business and Technology · Accounting and finance functions within business organisations

Which statement about the financial management objective of a profit-seeking company is most accurate?

Shareholder wealth maximisation is the better objective because it takes into account the timing and risk of returns, which simple profit maximisation ignores. Short-term profit can harm long-term value, and wealth also rises through share price growth, not only dividends.

  1. AMaximising short-term profit is always consistent with maximising shareholder wealth
  2. BMaximising shareholder wealth considers the timing and risk of returns, unlike simple profit maximisationCorrect
  3. CProfit maximisation accounts fully for risk and the time value of money
  4. DShareholder wealth is increased only by paying out all profits as dividends

Explanation

Shareholder wealth maximisation, reflected in dividends and share price growth, takes account of when returns arrive and how risky they are. Profit maximisation ignores both and may encourage short-termism, so the other statements are wrong.

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