Eco 550 Check Your Understanding Week One

1629 Words Jan 25th, 2013 7 Pages
Strayer University ECO 550 Week 1 Homework

Chapter 1

2. A principal-agent relationships involves the owners (principals) delegating decision-making authority to managers (agents). A conflict occurs when the agents pursue acceptable levels of shareholder wealth and profit rather than a maximization of profit. They are pursuing their own self-interests. One way that the agents act in their own self-interests would be by focusing on long-term job security. This could cause the agents to limit the amount of risk taken by the firm. The firm may have an opportunity that is considered a riskier venture that could produce high profits if successful. If the venture proves to be unsuccessful, then the agent is at risk of dismissal. Therefore,
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A company has to find a way to achieve a balance between rewarding managers to the point that it is detrimental to the company and finding a way to maximize the wealth of the shareholders.

6. The goal of shareholder wealth maximization model is to maximize the return to shareholders, and it is measured by the value of the firm’s common stock. It is also concerned with minimizing the risk to the shareholders’ bonuses. The model looks at the present value of all expected future cash flows (McGuigan, Moyer, & Harris, 2011, p.8). a) New foreign competitors: This has the potential to decrease the value of the firm and could impact the future cash flows of a company. The introduction of competition in the marketplace can affect the profitability of a company. The level of the decrease in value would depend on the involvement of the firm in global markets and the level of competition. b) Strict pollution control: This has the potential to decrease the value of the firm if the firm cannot adapt to the changes in requirements. If the firm allows the stricter requirements to hamper production, then the value of the firm would decrease. However, if the firm has planned for this threat by having flexibility when making business plans or creating new technology to take advantage of the Go Green movement, then there is an opportunity to increase the value

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