CNCT ACC CORPORATE FINANCE
12th Edition
ISBN: 9781264604081
Author: Ross
Publisher: MCGRAW-HILL HIGHER EDUCATION
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Question
Chapter 1, Problem 6CQ
Summary Introduction
To critically think about: Whether 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 the following two factors.
- First factor: The goals of the management are aligned to the shareholders goals.
- Second 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 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 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 compensation
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- A company's board thinks it needs to reward top management for advancing the company's aims. The board decides on bonuses based on share price rises at the end of each year. Bonuses will be given in shares that managers can keep or sell. What are the ramifications of such a bonus scheme?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_forwardIdentify an example of a systematic risk faced by QANTAS Ltd. from the scenarios below. Select one: a. The CEO of QANTAS resigns unexpectedly. b. A lawsuit is taken out against the management for poor governance. c. The government decreases company tax for all registered corporations. d. The price of jet fuel dramatically accelerates.arrow_forward
- Sometimes the management of a target firms fights a take over attempt even when that attempt appears to be in the best interest of the shareholders. Why would management take this stance? I need rush answer thankyouarrow_forwardWhich of the following statements is CORRECT? Select one: a. Conflict of interest between shareholders and managers is not possible. b. By definition, the agency problem can only take place in corporations but not in proprietorships and partnerships. c. Conflict of interest between shareholders and bondholders is not possible. d. Managers always work to maximize the long-run value, and therefore the price, of their company stocks. This is exactly what shareholders desire.arrow_forwardWhich of the following methods would be most likely to decrease the agency problems by helping motivate managers to act in the best interests of shareholders? 1. Increase the proportion of executive compensation that comes from stock options and reduce the proportion that is paid as cash salaries. 2. Eliminate a requirement that members of the board of directors have a substantial investment in the firm's stock. 3. Decrease the use of restrictive covenants in bond agreements. 4. Take actions that reduce the possibility of a hostile takeover. 5. Elect a board of directors that allows managers greater freedom of action.arrow_forward
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