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a. (1) Upon what financial goal does Stanley seem to be focusing? Is it the correct goal? Why or why not?

Stanley seems to be focusing on profit maximization, in another word the EPS performance. It is not the correct goal, as profits do not necessarily result in cash flows available to the stockholders, only when earnings increases are accompanied by increased future cash flows would a higher stock price be expected, therefore the stockholders wealth would be maximized. (2) Could a potential agency problem exist in this firm? Explain. There is a potential agency problem exist in this firm. First of all,he owns only 40% of the firm, but he manages actively all aspects of its activities and the other stockholders are not active in management of the firm, so he is an agent of the other owners. Secondly he is reluctant to take more than moderate risk, which might jeopardize his goal of profit maximization and reduce his personal wealth, so there is a conflict between owner wealth maximization and his personal goals. Scri Bd:

(a)Upon what financial goal does Stanley seem to be focusing? Is it the correct go al?Why or Why not? The financial goal that Stanley seems to be focusing on is maximizing t h e profitability of Track Software Inc. which is apparent in years 1997 to 2003 increases in n e t profit from ($50,000) to $48,000 respectively. His financial goal of p r o f i t maximization was also evident in his hesitance to hire a software developer because this would result in a salary cash outflow of $80,000 per year and lower the Earnings Per Share (EPS) in years to come.

Par: (1)Stanley is focusing on maximizing profit, as shown by the increase in net profits over thep e r i o d 1997 to 2003. His dilemma about adding the software designer, which wouldd e p r e s s e a r n i n g s f o r t h e n e a r t e r m , a l s o d e m o n s t r a t e s h i s emphasis on this goal.Maximizing wealth should be the correct goal f o r a f i n a n c i a l m a n a g e r . W e a l t h maximization takes a long-term p e r s p e c t i v e a n d a l s o c o n s i d e r s r i s k a n d c a s h f l o w s . Profits maximization does not integrate these three factors (cash flow, timing, risk) in thedecision process

(2) An agency problem exists when managers place personal goals ahead of corporate goals.Since Stanley owns 40% of the outstanding equity, it is unlikely that an agency problem would arise at Track Software

Another Scri:

A. Maximization of shareholder wealth, which means maximization of share price,should be the primary goal of the firm. Unlike profit maximization, this goalconsiders timing, cash flows, and risk. It also reflects the worth of the owners'investment in the firm at any time. It is the value they can realize should theydecide to sell their shares.

B. Yes, there appears to be an agency problem. Although compensation for management is tied to profits, it is not directly linked to share price. In addition,management's actions with regard to pollution controls suggest a profitmaximization focus, which would maximize their earnings, rather than an attemptto maximize share price