Case Analysis: Assessing the Goal of Sports Products, Inc.
Case Analysis: Assessing the Goal of Sports Products, Inc.
Submitted by: Group 1
Acebedo, Gladys
Bandiola, Penuel
Bautista, Jherwienne
Cruz, Abbie
Inojales, Geraldine
Miguel, Gen
Pili, Lian
Reyes, Alyssa
Susaya, Jennylyn
Tondo, Elma
Submitted to:
Prof. Jenely P. Sabio-Almirol
December 5, 2011
a. What should the management of Sports Products Inc. pursue as its overriding goal? Why?
The management of Sports Products Inc. should pursue maximization of shareholders’ wealth as its paramount goal. As far as we know, the stockholders are the owners of the firm and the ones bearing the most risk in running it. In line with this, the board of directors and/or the management is elected to take charge of the resources of the aforementioned party. As you see, it is plausible for the shareholders to benefit from the firm – the only way they gain is for the stock price to rise. As per the case, the firm has never paid dividends during its 20-year history. Furthermore, the stock price had declined nearly $2 per share over the past 9 months which doesn’t favor the shareholders at all. Our team deems it necessary to modify the company’s goal.
b. Does the firm appear to have an agency problem? Explain.
The firm appears to have an agency problem in this case.
The conflict of the contractual relationship between the shareholders and the board of directors is so obvious that even the subordinates began to question the decision-making ability of the financial managers. Manipulations such as the vile treatment to the environment and the so-called pollution control can hardly explain how profit rise and stock price decline at the same period. It appears that [the nature of the agency contract cannot fully prevent the parties from pursuing self-interest upon the expense of the other.1]
[Shareholders’ preferences are to maximize the value of the firm’s equity; Managers prefer to engage in activities
Submitted by: Group 1
Acebedo, Gladys
Bandiola, Penuel
Bautista, Jherwienne
Cruz, Abbie
Inojales, Geraldine
Miguel, Gen
Pili, Lian
Reyes, Alyssa
Susaya, Jennylyn
Tondo, Elma
Submitted to:
Prof. Jenely P. Sabio-Almirol
December 5, 2011
a. What should the management of Sports Products Inc. pursue as its overriding goal? Why?
The management of Sports Products Inc. should pursue maximization of shareholders’ wealth as its paramount goal. As far as we know, the stockholders are the owners of the firm and the ones bearing the most risk in running it. In line with this, the board of directors and/or the management is elected to take charge of the resources of the aforementioned party. As you see, it is plausible for the shareholders to benefit from the firm – the only way they gain is for the stock price to rise. As per the case, the firm has never paid dividends during its 20-year history. Furthermore, the stock price had declined nearly $2 per share over the past 9 months which doesn’t favor the shareholders at all. Our team deems it necessary to modify the company’s goal.
b. Does the firm appear to have an agency problem? Explain.
The firm appears to have an agency problem in this case.
The conflict of the contractual relationship between the shareholders and the board of directors is so obvious that even the subordinates began to question the decision-making ability of the financial managers. Manipulations such as the vile treatment to the environment and the so-called pollution control can hardly explain how profit rise and stock price decline at the same period. It appears that [the nature of the agency contract cannot fully prevent the parties from pursuing self-interest upon the expense of the other.1]
[Shareholders’ preferences are to maximize the value of the firm’s equity; Managers prefer to engage in activities