Finance: Profit Maximization and Wealth Maximization

This document discusses the concepts of profit maximization and wealth maximization in finance. It explains how companies like Starbucks and Coca Cola use profit maximization as a business objective, while Africa Express and Treetops Hospice focus on wealth maximization. The document also highlights the importance of wealth maximization over profit maximization and provides an overview of the components of a business plan, market analysis, financial analysis, and different business strategies like franchising, management contracts, and leasing. Finally, it explains the purpose of financial statements and their relevance in decision-making.

Running Head: FINANCE 0
Finance

Running Head: FINANCE
Contents
Question 1...............................................................................................................................................2
Question 2...............................................................................................................................................2
Question 3...............................................................................................................................................5
Question 4...............................................................................................................................................6
Question 5...............................................................................................................................................8
References...................................................................................................................................................9

Running Head: FINANCE
Question 1
Profit maximization: Profit maximization is the process in the economics either for short
run or long run with the help of which the company decides the price, input and the output. The
main objective in the financial management is generally the profit maximization. This is the
method by which the Earnings per share are increased. The decisions that are like investing and
the financing and are majorly focused on maximizing the profits at the optimum levels. Profit
maximization is the traditional approach and implies that most of the decisions of the business
are taken on the note that profits are the major criteria to decide the other activities of the
business (Nasreen & Ruming, 2018). Two such hospitality companies that use profit
maximization as business objective are Starbucks and Coca Cola. Starbucks uses the pricing
strategies and determines that the increase in the price is mainly because of rising labor and non-
coffee commodity costs and the low coffee costs are eventually helpful in making most of the
profits (Price intelligently, 2013). Similarly in case of the Coca Cola company the company sets
the marketing strategy of buy one get one which attracts the customers in large and on the other
hand the production cost is lower than the selling costs hence the company makes the profit. The
net profit margin of the Starbuck is 12.61% as the Coca Cola is 12.96% (Coca Cola, 2018).
Wealth maximization: Wealth Maximization is the concept of increasing the value of
the business in order to increase the overall value held by the shareholders. The concept requires
a company’s major ideology behind the maximization of the wealth is to continually search for
the highest possible returns from the investment made in the business while mitigating the loss
and the risks associated with it (Jensen, 2017). The two companies that are using the business
objective of the wealth maximization are Africa Express and Treetops Hospice. In case of
Africa express the wealth maximization option is chosen by the company to become the listed

Running Head: FINANCE
company in terms of the corporate governance and the sustainability (Sustainable Report, 2017).
Similar is the case of the Treetops Hospice where the company holds several campaigns and the
events for the customers to make aware about their product and the services and also the same
can be achieved by buy back of the shares (Treetops Hospice Care 2017).
The firms that are most successful depend upon the nature and the business of the firms.
However the wealth maximization is considered as the biggest element in making the decisions
as the wealth maximization helps in retaining more customers than the money. The wealth
maximization is treated more valuable than the profit maximization because of the fact that it
carries certain advantages which are above the profit maximization as it is based on the cash flow
and not only the profits. Also in case of the wealth maximization, the concept considers the time
value of money and it is important to know the present value of the dollar rather than the
anticipated value. Further the risk and the uncertainty factor is also taken into the consideration
to calculate the discounting factor as well (Jensen, 2017).
Question 2
Business plan is a blue print of the organization’s market analysis and the details of the
breakdown of the products and the services. A business plan is a written document that reflects
the future of the business which basically guides the management on what shall be done and how
it is to be done. Business plans are inherently strategic in nature. Since the business plans are
started with the pooling of the resources and matching the same with the ability of the company,
business plan takes a lot of time (Wang & Choi, 2015).

Running Head: FINANCE
The components of the business plan depend upon the nature and the operations of the
organization. However on an average there are several components which are common in nature
and every organization must include in its business plan.
 Executive summary
 Business Description
 Market analysis
 Organization Management
 Sales strategies
 Funding Requirements
 Financial Projections
Executive summary: The executive summary is considered as the elevator pitch which
distills the basic information in brief. It summarizes all the rest of the components that gives the
idea to the reader as well as the implementer. The best approach to write down the executive
summary is to write it after describing all the components so that one cannot miss out any
important detail (Wang & Choi, 2015).
Business description: Under the head of the business description the main details regarding
to the business must be disclosed. This includes the formation of the company, the mission and
the vision statement. There are several questions which are answered under this head such as
what is the business model, the location, the principles activities, the legal structure and some of
the market opportunities (Sherraden & Gilbert, 2016).
Market Analysis: This segment discloses the state of the market as a whole and it is an
exercise that locates you in respect to the competitors, and determines the profile of the market in

Running Head: FINANCE
the overall industry. The market analysis not only defines the target market the company has
selected but also determines the profile of the customers and the same can be compared with the
area in which the company is operating (Robinson, Henry, Pirie & Broihahn, 2015).
Organization management: This section is the most crucial section of the business plan
as it will determine the staff and the employees of the business. This section is useful more than
the pitch of the product or the service. The investors and the shareholders are not only interested
in knowing the profitability of the business but they are also interested in the team and its style of
working.
Sales strategies: the sales strategies are mainly dependent upon the fact that how the
company raises the money and the business. This section is all about explaining the pricing
strategy the company and describing the price point and everything. The relationship between the
company and the strategy can be clearly identified from this section of the business plan.
Funding requirements: the funding requirements of the company will determine the
amount of funds that can be funded and form what source these amounts can be funded. The cost
of the plan shall be kept ready by the management. For example a coffee house needs to be set
up so the entire costs shall be discussed in detail (Burns & Dewhurst, 2016).
Financial projections: finally the last segment of the business plan includes the financial
projections. The management shall make sure that all the summaries shall be carried out in
advance. The management shall be able to achieve the reality and strategies and based on that the
realistic projects shall be achieved (Wallace & Webber, 2017).
Purpose of the business plan

Running Head: FINANCE
The overall purpose of the business plan is to get organized in the management and this
not only helps in clarifying the thoughts but also makes the business a profitable one. A business
plan ensures that the manager shall not skip the important events and the steps which can derail
the efforts down the line. The accounting responsibilities and the track able performance shall be
recorded in detail (Williams & Dobelman, 2017).
Question 3
Market Analysis: The financial analysis is the procedure of assessing the assignments,
budget, and business. With the help of financial analysis, performance of other financial
companies can be assessed. The financial analysis is helpful to know and assess the stability,
liquidity, solvency, and profitability of entity. For example Java culture coffee shop is a good
example of market analysis as it shows a steady growth with gourmet coffee after analysing the
market in deep. Using this strategy the company could capture the student and the faculty by
almost 60%. It is helpful in warranting the monetary investment. The fundamental analysis and
technical analysis are good example of financial analysis (Bplans, 2017).
Financial Analysis: Further, with the help of market analysis, the effectiveness of
marketing approaches or strategies can be measured easily. It is qualitative and quantitative
assessment of market. With the help of excellence, great organisational skills and capability
market analysis can be employed (Williams & Dobelman, 2017). The bottom up approach and
top down approach are good example of market analysis. This approach is followed by almost all
companies to get an understanding of the Stocks. For example Toyota goes the bottom way as
the company feels that if the bottom ones are having the authority the company would secure
greater market share as the production of increase automatically once the bottom level is
considered as the top level. Toyota remains one of the classic companies in the manufacturing of

Running Head: FINANCE
the automobiles just to create their brand value successfully and cater their customers (Toyota,
2017).
Valuation Analysis: Furthermore, the value analysis refers to the procedure to assess the
asset’s price or estimated value of asset, whether the business, commodities, equity and real
estate. Different value analysis can be used by predictor in respect of different kinds of assets.
Breaking down valuation analysis is one of the great approaches of valuation analysis
(Sherraden & Gilbert, 2016). The valuation analysis is again used by many companies to gather
the information of the financial statements. Telstra’s current valuation is 51.33 billion and it is
used to value the current market value of the company so that the companies can figure out the
operations and compare the same either with the industry or the previous years (Telstra, 2017).
Question 4
Franchising: In simpler terms the concept of the franchising is a marketing concept that
can be adopted by the organization which is interested in the expansion of the business. Under
this mechanism the franchiser generally licenses many of the features such as the technical
knowhow, intellectual property, the business model as well as the branded products and the
services and sells the same the franchiser. In the return the amount is paid in the form off the fees
and agrees to comply with certain rules and regulations which are typically set out in the
Franchise agreement (Sherraden & Gilbert, 2016). The example of the franchising includes the
Mc Donalds, Pizza Hut and Burger King. The basic reason behind choosing this option is to
minimize the capital investment the risk of the liability. In the return the amount is paid in the
form off the fees and agrees to comply with certain rules and regulations which are typically set
out in the Franchise agreement. Mc Donald’s, Pizza hut and Burger king sells the best burgers
and the outlets can earn by covering the populated are such as near cinema halls. The power of

Running Head: FINANCE
the franchising model led to the suppliers of the Mc donalds provide high service and safety. The
company had opened almost 36000 restaurants more than 80% worldwide and nearly 90% in U.S
(Mcdonalds, 2018).
Management contacts: A management contract is the contract or an arrangement under
which the operational control of an enterprise is vested in a separate enterprise that accounts for
handling the managerial functions in return for fees. A management contract is involved in the
wide range of functions such as technical operations and other facilities. The management
contract will always require the three components namely conditions of the contract, duration of
the agreement and the method of computing the management fees (Brown & Potoski, 2013). The
advantages of the management contracts are that they are able to save the time and energy of the
management (Madanoglu & Castrogiovanni, 2018). The major example of the management
contract is hotel chain such as Radisson Blue where the hotels help in distributing of the
responsibility in the better manner. The organization receives expertise and experience provides
the continuity to an organization. The Radisson hotel group used the technique of management
contract in the Nordics with the number of 59 hotels and 14294 rooms. The company adopts the
asset right model for future investments (Radisson Blu, 2017).
Leasing: Lease is the contract where the one party which is the lessor grants the right to
use a particular good for a period of time to the other party the lessee which will pay for the
transfer the right to use fixed money regularly (Miller & Upton, 2016). The obligations of the
lessor are to deliver the goods in the proper condition and the payments are to be received. The
obligations of the lessee are to make payments and make choice of whether the assets can be
acquired at the time of expiration of the contract. The major example of the leasing company
is Wal-Mart as some areas of the business runs on the leasing basis where the major business

Running Head: FINANCE
deals with the consignor and consignee of the products. It offers high margin to the company and
also provides the greater access to the customers. Walmart is entering into the progressive
leasing with Lease to own program in Electronics department in Dallas. Customers are eligible
for this program and can avail the offer if their basket exceeds $200. This program helps the
Walmart to reach out to the customers who cannot afford the big ticket items (RNG, 2016).
Question 5
The basic purpose of the financial statements is to provide the relevant details about the
results of the operations and the financial position (Damodaran, 2016). The information is used
by the readers of the financial statements to optimize the correct decision of the allocation of the
resources. At a more refined level there is a different purpose attached with each of the different
financial statements. The financial statements include the income statement balance sheet and
profit. The financial statements are prepared to get the idea of the financial transparency. Even
the smallest detail in the balance sheet can have a huge impact on the performance of the
company.
The tax liability can be evaluated and the errors are mitigated (Muller, 2018). Moreover
the investors and the shareholders are interested in the financial statements as the ultimate
evaluation of the performance is done on the basis of how accurate the financial statements are.
The balance sheet is known as one of the most critical element of the financial statements. The
balance sheet is inclusive of the debit as well as the credit items. On the contrary the credit side
involves the capital management of the owners, loans and lastly the payables and current
liabilities. Since the financial statements are prepared to get the idea of the financial
transparency. Even the minute details in the balance sheet can have a huge impact on the
performance of the company.

Running Head: FINANCE
The balance sheet balances when both the debit side as well as the credit side has the
same effect. The balance sheet shall always match because the golden rule of the balance sheet is
that assets will always be equal to the current liabilities and shareholders’ equity. This system
lets the system to record the transactions in the two different accounts simultaneously. Hence the
balance sheet must always match (Joll, McKenna, McNabb & Shorey, 2018).

Running Head: FINANCE
References
Bplans, (2017). Coffee Shop Business Plans. Retrieved from.
https://www.bplans.com/coffee_shop_business_plan/market_analysis_summary_fc.php
Brown, T. L., & Potoski, M. (2013). Contract–management capacity in municipal and county
governments. Public Administration Review, 63(2), 153-164.
Burns, P., & Dewhurst, J. (Eds.). (2016). Small business and entrepreneurship. Macmillan
International Higher Education.
Coca Cola, (2018) Annual Report. Retrieved from
https://ycharts.com/companies/KO/profit_margin
Damodaran, A. (2016). Damodaran on valuation: security analysis for investment and
corporate finance (Vol. 324). John Wiley & Sons.
Jensen, M. C. (2017). Value maximisation, stakeholder theory and the corporate objective
function. In Unfolding stakeholder thinking (pp. 65-84). Routledge.
Joll, C., McKenna, C., McNabb, R., & Shorey, J. (2018). Developments in labour market
analysis (Vol. 11). Routledge.
Madanoglu, M., & Castrogiovanni, G. J. (2018). Franchising proportion and network
failure. Small Business Economics, 50(4), 697-715.
Mcdonalds, (2018). Our business model. Retrieved from.
https://corporate.mcdonalds.com/corpmcd/about-us/our-business-model.html

Running Head: FINANCE
Miller, M. H., & Upton, C. W. (2016). Leasing, buying, and the cost of capital services. The
Journal of Finance, 31(3), 761-786.
Muller, C. (2018). Freedom and Convict Leasing in the Postbellum South. American Journal
of Sociology, 124(2), 367-405.
Nasreen, Z., & Ruming, K. (2018). Room Sharing in Sydney: A Complex Mix of
Affordability, Overcrowding and Profit Maximisation. Urban Policy and Research, 1-19.
Price intelligently, (2013). How Starbucks Uses Pricing Strategy for Profit Maximization.
Retrieved from. https://www.priceintelligently.com/blog/bid/184451/how-starbucks-uses-
pricing-strategy-for-profit-maximization
Radisson Blu, (2017). Grow with us. Retrieved from.
https://www.radissonhotelgroup.com/uploads/Brand%20Resources/RHG/BUS%20DEV
%20BROCHURE%20EMEA%20022618.pdf
RNG, (2016). Walmart Testing Lease-to-Own Program in the Electronics Department in 100
Dallas. Retrieved from. https://www.retailnetgroup.com/research/news.aspx?id=91922
Robinson, T. R., Henry, E., Pirie, W. L., & Broihahn, M. A. (2015). International financial
statement analysis. John Wiley & Sons.
Sherraden, M., & Gilbert, N. (2016). Assets and the poor: New American welfare policy.
Routledge.
Sustainable Report, (2017). Annual Report. Retrieved from.
http://www.africa.undp.org/content/dam/rba/docs/Reports/AGENDA2063_WEB_FULL-
EN.pdf

Running Head: FINANCE
Telstra, (2017). Valuation Analysis. Retrieved from.
https://www.macroaxis.com/invest/ratio/TLS.AX--Current-Valuation
Toyota, (2017). Business plan. Retrieve from.
https://www.business-standard.com/article/opinion/the-toyota-way-goes-bottom-up-
105082301037_1.html
Treetops Hospice Care (2017). Quality Report. Retrieved from
https://www.treetopshospice.org.uk/about-us/quality-accounts/
Wallace, M., & Webber, L. (2017). The disaster recovery handbook: A step-by-step plan to
ensure business continuity and protect vital operations, facilities, and assets. Amacom.
Wang, X. J., & Choi, S. H. (2015). Stochastic lot sizing manufacturing under the ETS system
for maximisation of shareholder wealth. European Journal of Operational
Research, 246(1), 66-75.
Williams, E. E., & Dobelman, J. A. (2017). Financial statement analysis. World Scientific
Book Chapters, 109-169.