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Calculating Ratios Short Answer

Each answer should be at least 100 words in length. No loss of points for going over 100 words per answer. Less than 100 words will be deducted from the question's grade.

The answer to these questions can be stated many ways, but I have found these answers on line and the "correct" answer should be close to these. Your answer must be in your own words with no quotes from other sources. Please reference where you learned the answer to each question.

1. What is "agency theory?" How can setting the appropriate goals for the firm minimize the agency problem?

A possible response might come from these links:

DEFINITION of 'Agency Theory'

A supposition that explains the relationship between principals and agents in business. Agency theory is concerned with resolving problems that can exist in agency relationships; that is, between principals (such as shareholders) and agents of the principals (for example, company executives). The two problems that agency theory addresses are: 1.) the problems that arise when the desires or goals of the principal and agent are in conflict, and the principal is unable to verify (because it difficult and/or expensive to do so) what the agent is actually doing; and 2.) the problems that arise when the principal and agent have different attitudes towards risk. Because of different risk tolerances , the principal and agent may each be inclined to take different actions. 121 words

Setting the appropriate goals

Motivating Managers to Act in Shareholders' Best Interests There are four primary mechanisms for motivating managers to act in stockholders' best interests:

· Managerial compensation

· Direct intervention by stockholders

· Threat of firing

· Threat of takeovers

1. Managerial Compensation Managerial compensation should be constructed not only to retain competent managers, but to align managers' interests with those of stockholders as much as possible.

· This is typically done with an annual salary plus performance bonuses and company shares.

· Company shares are typically distributed to managers either as:

· Performance shares , where managers will receive a certain number shares based on the company's performance

· Executive stock options , which allow the manager to purchase shares at a future date and price. With the use of stock options, managers are aligned closer to the interest of the stockholders as they themselves will be stockholders.

1. Direct Intervention by Stockholders Today, the majority of a company's stock is owned by large institutional investors, such as mutual funds and pensions. As such, these large institutional stockholders can exert influence on mangers and, as a result, the firm's operations. 3. Threat of Firing If stockholders are unhappy with current management, they can encourage the existing board of directors to change the existing management, or stockholders may reelect a new board of directors that will accomplish the task. 4. Threat of Takeovers If a stock price deteriorates because of management's inability to run the company effectively, competitors or stockholders may take a controlling interest in the company and bring in their own managers.

http://www.investopedia.com/walkthrough/corporate-finance/1/agency-problem.aspx

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2. Differentiate between profit maximization and wealth maximization.

A possible response might come from these links:

Definition

A process that companies undergo to determine the best output and price levels in order to maximize its return . The company will usually adjust influential factors such as production costs , sale prices , and output levels as a way of reaching its profit goal . There are two main profit maximization methods used, and they are Marginal Cost-Marginal Revenue Method and Total Cost-Total Revenue Method. Profit maximization is a good thing for a company, but can be a bad thing for consumers if the company starts to use cheaper products or decides to raise prices .

Definition of wealth maximization?

Wealth maximization is the concept of increasing the value of a business in order to increase the value of the shares held by stockholders. The concept requires a company's management team to continually search for the highest possible returns on funds invested in the business, while mitigating any associated risk of loss. This calls for a detailed analysis of the cash flows associated with each prospective investment, as well as constant attention to the strategic direction of the organization. 180 words

http://www.accountingtools.com/questionableness's/maximization's

'3. Why must organizations focus on both shareholder wealth and the stakeholders?

A possible response might come from these links:

What is the difference between a shareholder and a stakeholder?

By Ayton MacEachern

Shareholders are stakeholders in a corporation, but stakeholders are not always shareholders. A shareholder owns part of a company through stock ownership, while a stakeholder is interested in the performance of a company for reasons other than just stock appreciation.

Stakeholders could be:

· employees who, without the company, would not have jobs

· bondholders who would like a solid performance from the company and, therefore, a reduced risk of default

· customers who may rely on the company to provide a particular good or service

· suppliers who may rely on the company to provide a consistent revenue stream

Although shareholders may be the largest stakeholders because shareholders are affected directly by a company's performance, it has become more commonplace for additional groups to be considered stakeholders, too.

Corporate Social Responsibility The new field of corporate social responsibility (CSR) has encouraged companies to take the interests of all stakeholders into consideration during their decision-making processes instead of making choices based solely upon the interests of shareholders. The general public is one such stakeholder now considered under CSR governance. When a company carries out operations that could increase pollution or take away a green space within a community, for example, the general public is affected. Such decisions may be right for increasing shareholder profits, but stakeholders could be impacted negatively. Therefore, CSR creates a climate for corporations to make choices that protect social welfare, often using methods that reach far beyond legal and regulatory requirements.

'4. Differentiate between the three financial statements with which managers should be familiar. How are they linked?

A possible response might come from these links:

Using Financial Statements As a Management Tool

They're not just for accountants, investors and lenders

By Daniel Richards

A financial statement is more than just a snapshot of your business' health that you provide to shareholders or potential investors: It's also a powerful diagnostic tool business owners can use to evaluate their firm's strengths and weaknesses and chart the way forward.

This three-part series will explain how to craft a balance, income and cash flow statement, guiding you through the criteria and terminology, demonstrating how to calculate the ratios that reveal your company's fiscal health and its standing among the competition, and suggesting ways to improve your outlook.

A brief explanation of the three statements:

· Balance sheet : The balance sheet is often described as a snapshot of a company's performance at a given time, such as the end of a quarter or fiscal year. The balance sheet identifies your company's assets and liabilities -- divided into near- and long-term obligations -- and stockholders' equity.

· Income statement : Also known as a profit-and-loss statement, the income statement summarizes a company's revenue and expenses for a given time period.

· Cash flow statement : This records the amounts of cash and cash equivalents that flowed into and out of a company in a given period. It is used to measure how much cash a company has on hand, which influences its ability to pay suppliers and employees and to meet other near-term obligations.

http://entrepreneurs.about.com/od/beyondstartup/a/financialstate.htm

(If needed:)

References

APA-formatted citation

Grading Guide

*Content* *70 Percent*	Met	Partially Met	Not Met	Comments:
Answered the question "What is "agency theory?" How can setting the appropriate goals for the firm minimize the agency problem?" correctly.	Met .88	.44	0
Answered the question "Differentiate between profit maximization and wealth maximization." correctly.	Met .88	.44	0
Answered the question "Why must organizations focus on both shareholder wealth and the stakeholders?" correctly.	Met .88	.44	0
Answered the question "Differentiate between the three financial statements with which managers should be familiar. How are they linked?" correctly.	Met .88	.44	0
Each anwer should be at least 100 words in length. No loss of points for going over 100 words per answer. Less than 100 words will be deducted from the question's grade.
	*Total Available*		*Total Earned*
	3.5		#/3.5
*Writing Guidelines* *30 Percent*	Met	Partially Met	Not Met	Comments:
The paper--including tables and graphs, headings, title page, and reference page--is consistent with APA formatting guidelines and meets course-level requirements.	Met .1	.05	0
Intellectual property is recognized with in-text citations and a reference page.	Met .1	.05	0
Paragraph and sentence transitions are present, logical, and maintain the flow throughout the paper.	Met .1	.05	0
Sentences are complete, clear, and concise.	Met .1	.05	0
Rules of grammar and usage are followed including spelling and punctuation.	Met .1	.05	0
	*Total Available*		*Total Earned*
	.5		#/.5
Assignment Total			#/4
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