Wealth Maximisation vs Profit Maximisation

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What does profit maximisation emphasise?

Short-term accounting profit (correct)
Minimising business cost
Long-term shareholder wealth
Increasing stock price

Which of the following is a key difference between profit maximisation and wealth maximisation?

Wealth maximisation ignores the timing of return, while profit maximisation cares about it.
Profit maximisation considers the risk of return, while wealth maximisation ignores it.
Wealth maximisation emphasises high returns regardless of risk, while profit maximisation cares about risk affecting business value.
Profit maximisation invests in research for long-term development, while wealth maximisation minimises business costs. (correct)

What does wealth maximisation consider regarding risk compared to profit maximisation?

Wealth maximisation ignores the risk completely.
Wealth maximisation considers the risk of return and its effect on business value. (correct)
Profit maximisation ignores the risk completely.
Profit maximisation only considers high-risk investments.

Which investment strategy is associated with wealth maximisation?

High-risk, high-return investments (A) Signup and view all the answers

What aspect does profit maximisation ignore compared to wealth maximisation?

Timing of return (D) Signup and view all the answers

Why do shareholders buy a company's shares according to the text?

To enhance shareholder wealth over time (A) Signup and view all the answers

What is the key difference between Profit Maximisation and Wealth Maximisation?

Profit Maximisation ignores the cost of capital, while Wealth Maximisation considers it. (D) Signup and view all the answers

Which element is crucial for increasing wealth according to the text?

Managing positive cash flow (C) Signup and view all the answers

What does Profit not equate to, as mentioned in the text?

Cash flow (D) Signup and view all the answers

Why is considering the cost of capital important for Wealth Maximisation?

To obtain funds to generate more money (C) Signup and view all the answers

How does Wealth Maximisation view the timing of return compared to Profit Maximisation?

Wealth Maximisation seeks long-term value creation, unlike Profit Maximisation. (C) Signup and view all the answers

What is the significance of positive cash flow in increasing wealth?

It helps to manage debts and expenses (B) Signup and view all the answers

What principle emphasizes reinvesting cash flows to increase greater cash inflows?

Buy assets that add value; avoid buying assets that do not (C) Signup and view all the answers

Why would a risk-averse investor demand for shares less, leading to a reduction in share price?

To avoid taking risks in investments (B) Signup and view all the answers

Which financial principle suggests that markets efficiently deal with information?

Markets are efficient and deal well with information (C) Signup and view all the answers

Why is the value of money today considered more than the value of money tomorrow according to the text?

Timing in financial decisions matters (C) Signup and view all the answers

Which principle focuses on the importance of adding value through asset selection?

Buy assets that add value; avoid buying assets that do not (B) Signup and view all the answers

What does 'Cash is king' principle emphasize about the value of an asset?

It is based on the cash flows produced over its life (A) Signup and view all the answers