Principles of Finance

College of Business and Economics

Principles of  Finance FINA 201

Individual Project (5%)

NAME: _________________________________________ ID #: __________________

THE AIM of this assignment is as follows:

·         Understand the basic ethics behind agency problem in business.

·         Use what you have learnt so far on the course to this project

WHAT YOU HAVE TO DO:

You should submit a 1000 words case study report on Principle agent problem in business companies.

You must follow Qatar University’s formatting guidelines and include references.  The report will be graded on the detailed criteria outlined on page three of this document.  The recommended layout of your report is given in the following bullet points.

·         Cover page (your names, date & number of words)

·         Executive summary (A high level summary of the project)

·         Table of contents

·         Introduction (background of chosen banks, firm or institution)

·         What the chosen company is doing regarding your chosen topic.

·         Analysis and evaluation.

·         Recommendations

·         Conclusion (summarize all the above)

·         References

·        Your project should be no more than 1000 words (executive summary and any references and appendices do not count towards the word limit).

Choose ONE of the following three cases to write about it:

The Fall of Enron

The collapse of energy giant Enron in 2001 showed how catastrophic the agency problem can be. The company's officers and board of directors, including Chairman Kenneth Lay, CEO Jeffrey Skilling and CFO Andy Fastow, were selling their Enron stock at higher prices due to false accounting reports that made the stock seem more valuable than it truly was. After the scandal was uncovered, thousands of stockholders lost millions of dollars as Enron share values plummeted.

Goldman Sachs and the Real Estate Bubble

Another agency problem occurs when financial analysts invest against the best interests of their clients. Investment giant Goldman Sachs and other stock brokerage houses developed mortgage-backed securities, known as collateralized debt obligations, then sold them "short," betting that the mortgages would undergo foreclosures. When the housing bubble hit in 2008, the values of the CDO's dropped and the short-sellers made millions of dollars. Meanwhile, millions of investors and homeowners lost nearly everything in the collapse.

Executive Compensation and WorldCom

When an executive uses company assets to underwrite personal loans, the agency problem occurs as the company takes on debts to provide its executives with higher incomes. In 2001, WorldCom CEO Bernard Ebbers took out over $400 million in loans from the company at the favorable interest rate of 2.15 percent. WorldCom did not report the amount on its executive compensation tables in its annual report. Details of the loans did not come out until the company's accounting scandal hit the news late that year.

Reading list:

http://www.nytimes.com/2011/11/08/opinion/end-bonuses-for-bankers.html?_r=0

http://euractivgreece.blogactiv.eu/2013/06/30/124/

Grading Criteria: