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ANSWER & ADDRESS REQUIREMENTS COMPLETELY
Resource: Principles of Managerial Finance
Prepare responses to the following problems from the text:
·
Ch. 5: P5–3, P5–4
Read the Assessing the Goal of Sports Products, Inc.
case study in attachment.
Write a 800-word paper in which you respond to the questions at the end of the case study (see attachment).
Format your paper consistent with APA guidelines.
See P5-3 & P5-4 Below:
P5–3 Risk preferences Sharon Smith, the financial manager for Barnett Corporation,
wishes to evaluate three prospective investments: X, Y, and Z. Currently, the firm
earns 12% on its investments, which have a risk index of 6%. The expected return
and expected risk of the investments are as follows:
a.
If Sharon were
risk-indifferent, which investments would she select?
Explain why.
b.
If she were
risk-averse, which investments would she select? Why?
c. If she were risk-seeking, which investments would she select? Why?
d.
Given the traditional risk preference behavior exhibited by financial managers,
which investment would be preferred? Why?
P5–4 Risk analysis Solar Designs is considering an investment in an expanded product
line. Two possible types of expansion are being considered. After investigating
the possible outcomes, the company made the estimates shown in the following
table:
a. Determine the
range of the rates of return for each of the two projects.
b. Which project is less risky? Why?
c. If you were making the investment decision, which one would you choose? Why?
What does this imply about your feelings toward risk?
d. Assume that expansion B’s most likely outcome is 21% per year and that all
other facts remain the same. Does this change your answer to part
c? Why?
Assessing the Goal of Sports Products, Inc.
Loren Seguara and Dale Johnson both work for Sports Products, Inc., a major producer of boating equipment and accessories. Loren works as a clerical assistant in the Accounting Department, and Dale works as a packager in the Shipping Department.
During their lunch break one day, they began talking about the company. Dale complained that he had always worked hard trying not to waste packing materials and efficiently and cost-effectively performing his job. In spite of his efforts and those of his co-workers in the department, the firm’s stock price had declined nearly $2 per share over the past 9 months. Loren indicated that she shared Dale’s frustration, particularly because the firm’s profits had been rising. Neither could understand why the firm’s stock price was falling as profits rose.
Loren indicated that she had seen documents describing the firm’s profit-sharing plan under which all managers were partially compensated on the basis of the firm’s profits. She suggested that maybe it was profit that was important to management, because it directly affected their pay. Dale said, “That doesn’t make sense, because the stockholders own the firm. Shouldn’t management do what’s best for stockholders?
Something’s wrong!” Loren responded, “Well, maybe that explains why the company hasn’t concerned itself with the stock price. Look, the only profits that stockholders receive are in the form of cash dividends, and this firm has never paid dividends during its 20-year history. We as stockholders therefore don’t directly benefit from profits. The only way we benefit is for the stock price to rise.” Dale chimed in, “That probably explains why the firm is being sued by state and federal environmental officials for dumping pollutants in the adjacent stream. Why spend money for pollution control? It increases costs, lowers profits, and therefore lowers management’s earnings!” Loren and Dale realized that the lunch break had ended and they must quickly return to work. Before leaving, they decided to meet the next day to continue their discussion.
To Do
a. What should the management of Sports Products, Inc., pursue as its overriding goal? Why?
b. Does the firm appear to have an agency problem? Explain.
c. Evaluate the firm’s approach to pollution control. Does it seem to be ethical?
Why might incurring the expense to control pollution be in the best interests of the firm’s owners despite its negative effect on profits?
d. Does the firm appear to have an effective corporate governance structure? Explain any shortcomings.
e. On the basis of the information provided, what specific recommendations would you offer the firm?
