Essentials of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
Essentials of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
9th Edition
ISBN: 9781259277214
Author: Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Bradford D Jordan Professor
Publisher: McGraw-Hill Education
Question
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Chapter 1, Problem 1.12CTCR
Summary Introduction

To critically think about: The act of the management is in the interest of the shareholders.

Introduction:

The managers of the firm act in the interest of the shareholders based on two factors. The goals of the management are aligned to goals of the shareholders, which is the first factor. The replacement of the managers for not pursuing stockholders goals is the second factor.

Situation:

Person X owns stock in a company. The present share price is $25. There is an announcement made by another company stating that it needs to purchase Person X’s company. It also says that it will pay $35 per share to obtain all the outstanding stocks. Person X’s management starts fighting off for the hostile bid.

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a. How does the offering of stock options to CEOs attempt to align CEO incentives with shareholder incentives?b. Enron was a company that was ruined in part because of the stock options offered to upper management. Explain.c. In addition to accounting reforms, how might stock options be changed to try to prevent situations like what happened at Enron from occurring in the future?
Which one of the following actions by a financial manager creates an agency problem?   Lowering selling prices that will result in increased firm value   Agreeing to expand the company at the expense of stockholders' value   Borrowing money when doing so creates value for the firm   Agreeing to pay management bonuses based on the market value of the firm's stock
1) "Information asymmetry lies at the heart of the ethical dilemma that managers, stockholders, and bondholders confront when companies initiate management buyouts or swap debt for equity." Comment on this statement. What steps might a board of directors take to ensure that the company's actions are ethical with regard to all parties? 2) Assume that you are the CFO of a company contemplating a stock repurchase next quarter. You know that there are several methods of reducing the current quarterly earnings, which may cause the stock price to fall prior to the announcement of the proposed stock repurchase. What course of action would you recommend to your CEO? If your CEO came to you first and recommended reducing the current quarter's earnings, what would be your response?
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