CORPORATE FINANCE(LL)
11th Edition
ISBN: 9781260430011
Author: Ross
Publisher: MCG
expand_more
expand_more
format_list_bulleted
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.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solutionStudents have asked these similar questions
Hi there, I want help to solve this questions
you are the CEO of Nelson Corporation, and the current stock price is $27.80. Pollack Enterprises announced today that it intends to buy Nelson Corporation. To obtain all the stock of Nelson Corporation, Pollack Enterprises is willing to pay $38.60 per share. At a meeting with your management, you realize that the management is not happy with the offer, and is against the takeover. Therefore, with the full support of your management team, you are fighting to prevent the takeover from Pollack Enterprises. Is the management of Nelson Corporation acting in the best interest of the Nelson Corpo ration stockholders? Explain your reason
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?
In which of the following cases will the agency problem between shareholders and managers be the greatest?
a) 75% of the common stock is owned by the founder of the company who decided to retire and hired a manager to run his business for him.
b)You own 50% of the common stock of the company. The other 50% is owned by 5 mutual funds.
c) The common stock of the company is owned by many diverse shareholders, with no shareholder owning more than 2% of the outstanding stock.
d)All top managers in the company own significant amounts of stock and stock options.
Knowledge Booster
Similar questions
- Which of the following actions would be likely to reduce potential conflicts of interest between stockholders and managers? a. A firm's compensation system is changed so that managers receive larger cash salaries but fewer long-term options to buy stock. b. The company changes the way executive stock options are handled, with all options vesting after 2 years rather than having 20% of the options awarded vest every 2 years over a 10-year period. c. The composition of the board of directors is changed from all inside directors to all outside directors, and the directors are compensated with stock rather than cash. d. The company's outside auditing firm is given a lucrative year-by-year consulting contract with the company. e. Congress passes a law that severely restricts hostile takeovers.arrow_forwardASSIGNMENT TWODazzle Co. is a stock‐market listed company that manufactures personal protection equipment. At a recent board meeting of Dazzle Co., a non‐executive director suggested that the company’s remuneration committee should consider scrapping the company’s current share option scheme, since executive directors could be rewarded by the scheme even when they did not perform well. A second non‐executive director disagreed, saying the problem was that even when directors acted in ways which decreased the agency problem, they might not be rewarded by the share option scheme if the stock market were in decline. Required:(a) Explain the nature of the agency problem in detail. (b) Discuss the use of share option schemes as a way of reducing the agency problem in a stock‐market listed company such as Dazzle Co.arrow_forward(Treasury Stock—Ethics) Lois Kenseth, president of Sycamore Corporation, is concerned about several large stockholders who have been very vocal lately in their criticisms of her leadership. She thinks they might mount a campaign to have her removed as the corporation’s CEO. She decides that buying them out by purchasing their shares could eliminate them as opponents, and she is confident they would accept a “good” offer. Kenseth knows the corporation’s cash position is decent, so it has the cash to complete the transaction. She also knows the purchase of these shares will increase earnings per share, which should make other investors quite happy. (Earnings per share is calculated by dividing net income available for the common shareholders by the weighted-average number of shares outstanding. Therefore, if the number of shares outstanding is decreased by purchasing treasury shares, earnings per share increases.)InstructionsAnswer the following questions.(a) Who are the stakeholders in…arrow_forward
- Which one of the following factors may affect stock return but out of the CEO's control?This chould potentially be a problem when trying up the compensation scheme to stock returns/ A.Supply chain risk management B.Federal monetary policy and regulations C.The rival firm recruits the company's employees D.Tte high inflation rate announced in the last quaterarrow_forwardWhich 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 stockarrow_forwardA company might purchase treasury stock for all of the following reasons excepta. it wants to increase its net assets by buying its stock low and reselling it at a higher price.b. management wants to decrease the earnings per share of common stock.c. management wants to avoid a takeover by an outside party.d. the company needs the stock to distribute to employees as part of its employee stockpurchase plans.arrow_forward
- Why might a company repurchase its own stock? A) It believes that the market undervalues its shares B) To offset dilutive effects of employee stock options granted C) To recognize an economic gain when the treasury shares are later sold for a profit D) To improve earnings per share by reducing the denominator E) All of the above is it just A and B or is it all of the abovearrow_forwardAn executive compensation scheme might provide a manager a bonus of $1,000 for every dollar by which the company’s stock price exceeds some cutoff level. In what way is this arrangement equivalent to issuing the manager call options on the firm’s stock?arrow_forwardA CEO wants to create an ownership culture. The stock is trading at $50 per share. Which approach is best? A. Give every employee 1,000 shares of restricted stock B. Give stock to senior management who can influence profits C. Introduce a cash profit sharing program D. All of the above are equally good ways to create an ownership culturearrow_forward
- 2 (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_forward10. A company would repurchase its own shares for all of the following reasons except if it a.believes the shares are overvalued. b.wishes to increase the earnings per share. c.wishes to prevent unwanted takeover attempts. d.needs the shares for employee bonuses.arrow_forwardYou have been hired as a financial consultant by Himalaya Ltd. The CEO, Ms. Natasha Romanoff has just returned from a conference of top managers, held at a prestigious University in Australia where the issue of share buy-backs, dividends, and earnings per share (EPS) were debated. She was particularly puzzled after hearing the quote below: Share buybacks (repurchases) are going into the market and pumping up the price of your shares by using your own cash, not to invest in business. - (Elizabeth Warren, U.S. Senator,2021)Required:In light of the above statement write a short memorandum format report to the CEO, Natasha Romanoff to answer the following four questions raised by Ms. Romanoff.i. Discuss what dividends, EPS and share buybacks are?ii. Discuss at least TWO reasons why companies pay dividends to shareholders?iii. Based on the statement above by Elizabeth Warren (U.S. Senator) criticallyevaluate why companies may consider buying back its own shares. iv. Discuss at least TWO…arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
- Intermediate Financial Management (MindTap Course...FinanceISBN:9781337395083Author:Eugene F. Brigham, Phillip R. DavesPublisher:Cengage LearningManagerial AccountingAccountingISBN:9781337912020Author:Carl Warren, Ph.d. Cma William B. TaylerPublisher:South-Western College PubCornerstones of Financial AccountingAccountingISBN:9781337690881Author:Jay Rich, Jeff JonesPublisher:Cengage Learning
- Principles of Accounting Volume 1AccountingISBN:9781947172685Author:OpenStaxPublisher:OpenStax College
Intermediate Financial Management (MindTap Course...
Finance
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Cengage Learning
Managerial Accounting
Accounting
ISBN:9781337912020
Author:Carl Warren, Ph.d. Cma William B. Tayler
Publisher:South-Western College Pub
Cornerstones of Financial Accounting
Accounting
ISBN:9781337690881
Author:Jay Rich, Jeff Jones
Publisher:Cengage Learning
Principles of Accounting Volume 1
Accounting
ISBN:9781947172685
Author:OpenStax
Publisher:OpenStax College