ESSENTIALS OF CORPORATE FINANCE (LL)
9th Edition
ISBN: 9781260282191
Author: Ross
Publisher: MCG
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Question
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
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Comment on this statement. What steps might a board of directors take to ensure that the
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Chapter 1 Solutions
ESSENTIALS OF CORPORATE FINANCE (LL)
Ch. 1.1 - What are the major areas in finance?Ch. 1.1 - Prob. 1.1BCQCh. 1.2 - What is the capital budgeting decision?Ch. 1.2 - What do you call the specific mixture of long-term...Ch. 1.2 - Prob. 1.2CCQCh. 1.3 - Prob. 1.3ACQCh. 1.3 - Prob. 1.3BCQCh. 1.3 - Prob. 1.3CCQCh. 1.3 - Prob. 1.3DCQCh. 1.4 - Prob. 1.4ACQ
Ch. 1.4 - What are some shortcomings of the goal of profit...Ch. 1.5 - Prob. 1.5ACQCh. 1.5 - Prob. 1.5BCQCh. 1.5 - What incentives do managers in large corporations...Ch. 1.6 - What is a dealer market? How do dealer and auction...Ch. 1.6 - Prob. 1.6BCQCh. 1.6 - What does OTC stand for? What is the large OTC...Ch. 1 - Prob. 1.2CCh. 1 - Prob. 1.3CCh. 1 - Prob. 1.4CCh. 1 - Who are the stakeholders in a firm?Ch. 1 - What are the defining features of a primary...Ch. 1 - Prob. 1.1CTCRCh. 1 - Prob. 1.2CTCRCh. 1 - Prob. 1.3CTCRCh. 1 - Prob. 1.4CTCRCh. 1 - Prob. 1.5CTCRCh. 1 - Prob. 1.6CTCRCh. 1 - Primary versus Secondary Markets. Youve probably...Ch. 1 - Auction versus Dealer Markets. What does it mean...Ch. 1 - Prob. 1.9CTCRCh. 1 - Prob. 1.10CTCRCh. 1 - Prob. 1.11CTCRCh. 1 - Prob. 1.12CTCRCh. 1 - Prob. 1.13CTCRCh. 1 - Prob. 1.14CTCRCh. 1 - Prob. 1.15CTCRCh. 1 - The McGee Cake Company In early 2010, Doc and Lyn...Ch. 1 - The McGee Cake Company In early 2010, Doc and Lyn...Ch. 1 - The McGee Cake Company In early 2010, Doc and Lyn...
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Similar questions
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- 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 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_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
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