ANSWER a)  Wealth Maximization: Wealth maximization means of shareholder’s wealth. It is a combination of two words viz. wealth and maximization. A wealth of a shareholder maximizes when the net worth of company maximizes. Wealth maximization is the ability of a company to increase the market value of its common stock over time. The market value of the firm is based on many factors like their goodwill, sales, services, quality of products. It helps in evaluating the overall performance of the business organization. This helps in achieving maximum dividend. It aims at increasing the worth of the firm. For example : To measure the worth of a project , criteria like present value of its cash inflow and present value of cash outflow is taken . For the business it is not necessary that profit should be the only objective it may concentrate on various other aspects like increasing sales, capturing more market share etc which will take care of profitability. So, we can say that profit maximization is a subset it will facilitate wealth creation.

Profit Maximization:

Profit Maximization is the capability of the firm in producing maximum output with the limited input, or it uses minimum input for producing stated output. It is termed as the foremost objective of the company. Earlier, it has been recommended that motive of any organization is to earn profit .It was considered essential for success and growth of the company.

Risk involved in profit maximization:

1. Profit maximization ignores a risk factor of finance.

2. It will ignore the financing aspect of the company. The company will borrow unlimited just to make profit.

3. It ignores the concept of time value of money.

4. It focuses only on the immediate effect. So. Wealth maximization considers all these factors, and gives the good result. Profit maximization does not involve the time value of money. In profit maximization, it is not cleared which profit is to be maximized. Profit maximization only concentrates on immediate effect and ignores the future effect.

MERITS OF WEALTH MAXIMIZATION

1. It takes care of the shareholder’s interest, lender’s or creditor’s interest, employees or workers interest.
2. It focuses on achieving the long term goals of the organization.
3. It takes into account the time value of money.
4. It considers risk factor.
5. It maintains the market price of shares of the organization.
6. It recognizes the value of regular payments of dividends.

conclusion

The main objective of company should of wealth maximization rather than profit maximization as there is always risk associated in achieving profit. The risk can be neglected in short run but cannot be ignored in long run. Shareholders who invest their money in company for better returns and if they see nothing is being done to increase their wealth. They will invest somewhere else. So, profit maximization should be considered as a sole parameter but wealth maximization should be the main motive of any firm. Profit maximization is a subset of wealth maximization and its necessary for the survival in the market but when it comes to decisions which will directly affect the interest of the shareholders then, wealth maximization is a better operative criterion.

b)

The agency problem is a conflict of interest inherent in any relationship where one party is expected to act in another's best interests. In corporate finance, the agency problem usually refers to a conflict of interest between a company's management and the company's stockholders. The manager, acting as the agent for the shareholders, or principals, is supposed to make decisions that will maximize shareholder wealth even though it is in the manager’s best interest to maximize his own wealth.

Causes Behind Principal-Agent Problems

The main reasons for the principal-agent problem are conflicts of interests between two parties and the asymmetric information between them (agents tend to possess more information than principals).

The principal-agent problem generally results in agency costs that the principal should bear. Because agents can act in their interests at the principals’ expense, the principal-agent problem is an example of a moral hazard.

The principal-agent problem was conceptualized in 1976 by American economists, Michael Jensen and William Meckling.

The problem has applications in political science and in economics. It is especially significant in the understanding of corporate governance.