Problem 2. Explain several dimensions of the shareholder-principal conflict with manager-agents known as the principal-agent problem. To mitigate agency problems between senior executives and shareholders, should the compensation committee of the board devote more to executive salary and bonus (cash compensation) or more to long-term incentive? Why? What role does each type of pay play in motivating managers? - To reduce problems between senior executives and shareholders, it has to be done and appropriate incentives have to be offered. Compensation committee of the board should devote more to executive salary and bonus and more to long term incentives. Managers should be explained that long term incentives are beneficial to both the parties and that they work in an appropriate manner, bonuses must be remunerated across them.
Problem 3. Corporate profitability declined by 20 percent from 2008 to 2009. What performance percentage would you use to trigger executive bonuses for that year? Why? What issues would arise with hiring and retaining the best managers? - We should use shareholder wealth as an indicator to check whether it is increased or not and it bases on executive bonuses to decided. Qualification, experience and package would be issues that arise with hiring and retaining the best manager.
Problem 6. In the context of the shareholder wealth-maximization model of a firm, what is the expected impact of each of the following events on the value of the firm? Explain why. a. New foreign competitors enter the market - Foreign firms can influence the productivity of domestic firms through a number of channels because when foreign firms with advanced technologies enter a local market they introduce new technologies to the industry.
b. Strict pollution control requirements are implemented by the government. - When government placing strict limits on the amount of a pollutant firms are allowed to emit and fining them for exceeding this limit, taxing firms that pollute in order to increase their costs and decrease market supply, reducing output and increasing price closer to a socially optimal level, or simply banning the production and consumption of goods whose existence places excessive spillover costs on society.
c. A previously nonunion workforce votes to unionize. - This would decrease the value of the firm because; unionization of workforce would increase the union strike threats with uncertainty of operations. The firm may have to stop its operations
d. The rate of inflation increases substantially - The high rate of inflation can reduce output growth
e. A major technological breakthrough is achieved by the firm, reducing its cost of production. - The value of technology depends upon the ability of its producer and marketer to obtain a sustainable advantage over competitors, thereby achieving higher share, sales, and profits.
Problem 1. For