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Assignment 2

Management of a large publicly owned corporation should make decisions to maximize shareholder welfare rather than personal interests. Shareholders can ensure alignment of management interests through compensation tied to profits/stock and ability to remove underperforming management. Other factors like pressure to avoid hostile takeovers may influence management against shareholder interests. While fighting a takeover above market price could benefit shareholders, management resisting a higher offer primarily to retain control are not acting in shareholders' best interests. Accounting income differs from cash flow as it includes non-cash expenses like depreciation that do not affect cash position.

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285 views

Assignment 2

Management of a large publicly owned corporation should make decisions to maximize shareholder welfare rather than personal interests. Shareholders can ensure alignment of management interests through compensation tied to profits/stock and ability to remove underperforming management. Other factors like pressure to avoid hostile takeovers may influence management against shareholder interests. While fighting a takeover above market price could benefit shareholders, management resisting a higher offer primarily to retain control are not acting in shareholders' best interests. Accounting income differs from cash flow as it includes non-cash expenses like depreciation that do not affect cash position.

Uploaded by

nnaznin
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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BUS 510 Financial Management

Assignment -2

Q1. If you were the president of a large publicly owned corporation, would you make
decisions to maximize stockholders’ welfare or your own personal interests? What are
some actions stockholders can take to ensure that management’s interests and those of
stockholders coincided? What are some other factors that might influence
management’s actions?

Ans: - Such factors as a compensation system that is based on management performance (bonuses
tied to profits or stock option plans) as well as the possibility of being removed from office (voted out of
office or an unfriendly tender offer by another firm) serve to keep management's focus on stockholders'
interests.

Q2. Suppose you own stock in a company. The current price per share is $25. Another
company has just announced that it wants to buy your company and will pay $35 per
share to acquire all the outstanding stock. Your company’s management immediately
begins fighting off this hostile bid. Is management acting in the shareholders’ best
interests? Why or why not?
Ans: - The goal of management should be to maximize the share price for the current shareholders. If
management believes that it can improve the profitability of the firm so that the share price will exceed
$35, then they should fight the offer from the outside company. If management believes that this bidder
or other unidentified bidders will actually pay more than $35 per share to acquire the company, then
they should still fight the offer. However, if the current management cannot increase the value of the
firm beyond the bid price, and no other higher bids come in, then management is not acting in the
interests of the shareholders by fighting the offer. Since current managers often lose their jobs when the
corporation is acquired, poorly monitored managers have an incentive to fight corporate takeovers in
situations such as this.

Q3. Why is accounting income not the same as cash flow?


Ans: - 1.) accounting income is not the same as cash flow b/c an income statement contains
Non-cash Items. Non-cash items are expenses charged against revenues that do not directly
affect cash flow, such as depreciation.

2.) The deduction or depreciation is just an accounting number, its not ACTUAL cash spent. The
depreciation deduction is simply another application of the matching principle in accounting.
Q4. Reliable Auto Parts has 5,000 shares of common stock outstanding. The company also has
the following amounts in revenue and expense accounts.
Sales revenue $ 85,000
General and administrative expense excluding depreciation 7,500
Selling expense 4,000
Interest expense 3,500
Depreciation expense 5,000
Preferred stock dividends 500
Cost of goods sold 50,000
Tax rate 40%

Construct an income statement in good form and answer the following:

(a) Gross profits. (b) EBIT.


(c) Net profits after taxes (d) Earnings per share.
(e) Dividend per share if 60% of the earnings are distributed as dividend.

Q5. Predator Pucks, Inc., has current assets of $4,000, net fixed assets of $22,500,
current liabilities of $3,400, and long-term debt of $6,800. What is the value of the
shareholders’ equity account for this firm? How much is net working capital?

Q6. Mama Roach Exterminators, Inc., has sales of $634,000, costs of $305,000,
depreciation expense of $46,000, interest expense of $29,000, and a tax rate of 35
percent. What is the net income for this firm? Suppose the firm paid out
$86,000 in cash dividends. What is the addition to retained earnings?
Suppose the firm had 30,000 shares of common stock outstanding. What is the
earnings per share, or EPS, figure? What is the dividends per share figure?

Q7. Given the following information for Mama Mia Pizza Co., calculate the depreciation
expense:
Sales $34,000; costs $16,000; addition to retained earnings $4,300; dividends paid
$1,200; interest expense $2,300; tax rate 35 percent.
Date of Submission: September 19, 2020 before 5:00 PM.
Assignment must be submitted by using the same Google form in PDF
format.

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