Intermediate Financial Management
14th Edition
ISBN: 9780357516782
Author: Brigham, Eugene F., Daves, Phillip R.
Publisher: Cengage Learning
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Question
Chapter 10, Problem 5MC
Summary Introduction
Case summary:
Person X is decided to start a company relating to software products which integrates a wide range of media devices like laptops, desktop computers, cell phones and digital video recorders. He has selected student body at his university as an initial market.
Once his plans are successful and he will decide to expand its business to other colleges and areas and eventually to go national wide. Later he will plan to go public issue with an IPO to buy a yacht. These points are kept in mind while deciding the potential investors of his company.
To discuss: Six potential managerial behaviours that could harm a firm’s value.
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Students have asked these similar questions
Identify all of the correct statements:
a. Managers act in their own interests, and so there is no way to align their interests with those of
the owners
b.
None of the answers are correct
C.
To motivate managers in non-profit firms, no employee incentives are needed
d. Managers naturally seek to maximize shareholders' wealth
To align the interests of managers and owners, owners must design systems to monitor and
reward management behavior that increases the firm's profits
e.
What is one of the ways that accounting is used to direct and control the manager of a corporation?
a.Threatening to tell shareholders a mangers income if a manager makes a ‘poor financial’ decision.
b.Linking of a mangers performance to a bonus that depends on accounting profit.
c.Making decisions based on the accounting information regardless of managerial input.
d.Using income smoothing to assure a manager that they can invest in a low risk investment.
According to your textbook, the financial manager should attempt to maximize the wealth of the firm’s shareholders by achieving the highest possible value for the firm. 1) Please explain how this concept is different from the idea of earning the highest possible profit for the firm; 2) explain how social responsibility and ethical behavior on the part of corporate management affects the value of the firm; 3) discuss the “Agency Theory” and how that relates to the goal of achieving the highest value for the firm.
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Similar questions
- which of the following could be a potential solution to the agency problem between managers and shareholders? 1. having the managers meet more often 2. having fewer managers 3. paying the managers higher cash wages 4. having more female managers than the males managers 5. giving the managers a part of the company through stock-based compensationarrow_forwardWhich of the following are true statements on the principal-agent problem between corporate managers and shareholders: O Owners can ensure that the managers are actng as desired O Corporate governance will resolve the problem with certainty O There may be considerable leeway for owners to serve their own interests Managers usually have better information than owners This process is banned on the stock market There may be considerable leeway for managers to serve their own interests There is no other way for companies to raise money It relates to the business modelarrow_forwardWe can imagine the financial manager doing several things on behalf of the firm's stockholders. For example, the manager might: Make shareholders as wealthy as possible by investing in real assets. Modify the firm's investment plan to help shareholders achieve a particular time pattern of consumption. Choose high- or low-risk assets to match shareholders' risk preferences. Help balance shareholders' checkbooks. But in well-functioning capital markets, shareholders will vote for only one of these goals. Which one? Why?arrow_forward
- 62) Agency Theory suggests: A) The interests of the managers are aligned with the interest of stockholders. B) The management is focuses on looking after its own self interest rather than focusing on the interest of the stockholders. c) Managers would never spend stockholder money on their own comforts. d) Stockholders reward managers with larger office space and many incentives to encourage them to perform well.arrow_forwardA well-run company should align the management’s interest and with the owner’s interests. What are some actions that stockholders can take to ensure that management’s and stockholders’ interests are aligned? Is this important? What are some of the risks/consequences if the management’s interests are not aligned with the owners?arrow_forward2 (a)There is a conflict of interest between stockholders and managers. In theory, stockholders are expected to exercise control over managers through the annual meeting or the board of directors. In practice, why might these disciplinary mechanisms not work? (b)There are some corporate strategists who have suggested that firms focus on maximizing market share rather than market prices. When might this strategy work, and when might it fail? (c)It is often argued that managers, when asked to maximize stock price, have to choose between being socially responsible and carrying out their fiduciary duty. Do you agree? Can you provide an example where social responsibility and firm value maximization go hand in hand?arrow_forward
- CEO compensation design is effective in controlling the behavior in their decision making. How a compensation package could possibly work in adjusting a CEO’s risk taking behavior (in investments) and in balancing long-term vs. short term interests of a company?arrow_forwardA CEO is considering whether to invest in Developing leadership capabilities in its managers. To make this determination, which of the following should he take into account? O People with strong leadership skills perform managerial functions more efficiently. O Improving managers' leadership skills will enable them to solve problems more effectively. O How leaders behave has a major impact on employee performance. O The attitudes of leaders have little effect on the attitudes of rank-and-file employees Identify the trait as one of either a manager or a leader. Trait Is concerned with "doing things right" Has a long-term perspective Solves problems Manager Leader ° O °arrow_forwardWithin the context of financial management, it is important that organizations attempt to align their managers' interests with that of the shareholders. In Chapter 16, Berk and DeMarzo (2020) provide several examples of agency conflict or a conflict between the owners and the management of a firm. Examples of these are: (a) at times managers will take on less (greater) risk than they would if they were the owners of the firm and (b) due to the separation of ownership and control managers are able to entrench themselves within firms and have little risk of being replaced. Provide a few examples of mechanisms that organizations could use to align the interests of both the owners of the firm and its managers.arrow_forward
- managers speak as if the corporation has other goals. For example, they may say that their job is to "maximize profits." That sounds reason- able. After all, don't shareholders want their company to be profitable? But taken literally, profit maximization is not a well-defined corporate objective. Here are three Sometimes you hear reasons: Explain why maximizing market value is the logical financial goal of the corporation.arrow_forwardWhat is the commonly-cited objective of corporate managers in make decisions for a firm? Maximize the value of common shares outstanding. Maximize total revenue. Minimize total expenses. Minimize the risk of bankruptcy.arrow_forwardAgency theory suggests that one way to motivate managers to act in the best interests of the owners/shareholders is to link managerial compensation to firms' payoffs, such as net income or share returns. However, such a linkage imposes risk on the manager. Required: (1) Why is it important to control or reduce some of the risk thus imposed on managers? Explain. Discuss two methods by which risk imposed on the managers could be reduced.arrow_forward
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