Skip to content

CS Executive · Corporate Accounting and Financial Management · Introduction to Financial Management

Which statement best explains why wealth maximisation is preferred over profit maximisation as the primary objective of financial management?

Wealth maximisation is preferred because it accounts for the timing and risk of cash flows and looks at long-term value for shareholders. Profit maximisation relies on accounting profit, ignores time value of money and risk, and can encourage short-term decisions that reduce the firm's overall value.

  1. AIt considers the timing and risk of cash flows and focuses on the long-term value of the firm to its ownersCorrect
  2. BIt ignores risk so that managers can pursue the highest possible accounting profit
  3. CIt concentrates only on the current year's earnings per share
  4. DIt requires the firm to avoid all external borrowing

Explanation

Wealth maximisation is based on the present value of expected cash flows, so it recognises both when cash is received and how risky it is. Profit maximisation uses accounting profit of a period and ignores time value and risk. The option on current EPS describes a profit-based, short-term view, which is the weakness of profit maximisation.

Did you get it right without looking?

One question tells you little. A timed set on Introduction to Financial Management shows your real accuracy, how long you take and where you lose marks.

Practise Introduction to Financial ManagementFree diagnostic mock

More Introduction to Financial Management questions