Assertion (A): Shareholders wealth maximization and not the profit maximization is an appropriate and operationally feasible financial management goal.
Reason (R): There exists a principal agent relationship between the shareholders and management of the company.

Both A and R are true but R is not the correct explanation of A

The correct answer is Option 2: Both A and R are true but R is not the correct explanation of A

Both Assertion(A) and Reason (R) are true, but they are unrelatable to each other.

Assertion (A): Shareholders wealth maximization and not the profit maximization is an appropriate and operationally feasible financial management goal. This is correct. The primary aim of financial management is to maximise shareholders’ wealth, which is referred to as the wealth-maximisation concept.

This is because a company funds belong to the shareholders and the manner in which they are invested and the return earned by them determines their market value and price. It means maximisation of the market value of equity shares. The market price of equity share increases, if the benefit from a decision exceeds the cost involved. All financial decisions aim at ensuring that each decision is efficient and adds some value. Such value additions tend to increase the market price of shares. Therefore, those financial decisions are taken which will ultimately prove gainful from the point of view of the shareholders. The shareholders gain if the value of shares in the market increases. Those decisions which result in decline in the share price are poor financial decisions.

Reason (R): There exists a principal agent relationship between the shareholders and management of the company.This is also correct. The agency relationship exists between shareholders and managers in a company. The principal-agent relationship between shareholders (the principals) and management (the agents) exists because shareholders delegate decision-making authority to managers. Shareholders are the passive principals and managers are active agents. Shareholders are the real owners of a company.

While both statements are true, the reason (R) does not directly explain why shareholder wealth maximization, rather than profit maximization, is an appropriate and feasible financial management goal.