Question

1) Would you characterize the relationship between a company’s shareholders and management as cooperative or combative? Why?

2) Your first assignment as a financial analyst is to value the stock of Tesla. Unfortunately, Tesla hasn’t paid any dividends yet so we can’t use the dividend discount model. But you do know that the average price-earnings (PE) ratio for the car manufacturing industry is 30 and you also know Tesla’s earnings-per-share (EPS) is $1. Using the PE valuation method, what is the present value (fair price) of Tesla’s stock?

Answer 1

Part a

Shareholders refers to the group of person who owns equity shares in a company and as such they also benefits from the success of the company in the form of dividend and capital gain . They enjoy voting rights at shareholdrs meeting and participates in major companies decision like appointment of board of director, mergers and aquisition . shareholders who holds 50% or more shares / equity are called majority shareholdes and basically the founder of the company. The shareholders also enjoy the privilege of

a. inspecting books of accounts

b. participation in shareholders meeting , AGM etc.

etc.

Shareholders are thus the one who has their money invested in the organisation but they do not participate in day to day activities of business .

Managemnet on the other hand refers to the administration of the organisation.They take important decision of the busiess, set goals and objectives of the organisation and makes plan to acheive them . They also aims to maximize shareholders wealth.

Managers are thus the group of skillfull and competitive group of people who run the businessand in return expect to get paid for their skills fairly .

In my opinion their relationship is both cooperative and combative.

Management and shareholders both have the objective and aims to maximiz the business profit. They both wants the organisation to be successful and generate more revenue in future.

Shareholders appoints board of directors who then appoints the management team to run the business . Thus, shareholders can monitors managers behaviour.

But shareholders do not managers to get paid more as it will impact their earnings (Dividend).

Profit generated will have to get distributed among the shareholders in the form of Dividend income after makng payments to management . Thus higher the payscale of the management less will be the profit to the shareholders.

This give rise to conflict among shareholders and management.

On on side Shareholder wants best management team