Question

Assessing the Goal of Sports Products, Inc.

Mona and Hamad both work for Sports Products, Inc., a major producer of boating equipment and accessories. Mona works as a clerical assistant in the accounting department, and Hamad works as a packager in the shipping department. During their lunch break one day, they began talking about the company. Hamad complained that he had always worked hard trying not to waste packing materials and efficiently and cost-effectively performing his job. In spite of his efforts and those of his co-workers in the department, the firm’s stock price had declined nearly US$2 per share over the past 9 months. Mona indicated that she shared Hamad’s frustration, particularly because the firm’s profits had been rising. Neither could understand why the firm’s stock price was falling as profits rose.

Mona indicated that she had seen documents describing the firm’s profit-sharing plan under which all managers were partially compensated on the basis of the firm’s profits. She suggested that maybe it was profit that was important to management, because it directly affected their pay. Hamad said, “That doesn’t make sense, because the stockholders own the firm. Shouldn’t management do what’s best for stockholders? Something’s wrong!” Mona responded, “Well, maybe that explains why the company hasn’t concerned itself with the stock price. Look, the only profits that stockholders receive are in the form of cash dividends, and this firm has never paid dividends during its 20-year history. We as stakeholders therefore don’t directly benefit from profits. The only way we benefit is for the stock price to rise.” Hamad chimed in, “That probably explains why the firm is being sued by national environ- mental officials for dumping pollutants in the adjacent stream. Why spend money for pollution control? It increases costs, lowers profits, and therefore lowers management’s earnings!”

Questions

a. What should the management of Sports Products, Inc., pursue as its overriding goal? Why?

b. Does the firm appear to have an agency problem? Explain.

c. Evaluate the firm’s approach to pollution control. Does it seem to be ethical? Why might incurring the expense to control pollution be in the best interests of the firm’s owners despite its negative effect on profits?

d. Does the firm appear to have an effective corporate governance structure? Explain any shortcomings. e. On the basis of the information provided, what specific recommendations would you offer the firm?

Answer 1

A definitive objective of budgetary or fincial administration is profit maximization for the proprietors of a organization, ie the investors. Profit maximization for the investors fails when the organization neither delivers profits to the investors and when the market capitalization ( number of extraordinary offers x market cost per share) decays rather than expanding. In the given circumstance, the organization is procuring benefits, yet no level of the benefits is being conveyed to the investors. Likewise, the market cost of the stock is continuously declining, driving to disintegration of investor riches. Hence, it is a one-two punch for the investors.

b. While the benefits of the organization have been rising, the market cost of the offers is falling.

Market cost = Earnings per Share x P/E proportion.

While EPS is on th rise, the P/E proportion of the organization is falling, on the grounds that the market is most organization could be looking in the predictable outpourings for the organization sooner rather than later, which could constrain it into chapter 11. The specialists could even close down the organization. Thusly, the current investors are conceivably likely considering in the gigantic suit costs counting conceivable class activity suits that the future, because of its absolute dismissal for the climate and contamination control. The market sees that there will be mammoth money outpouring For the organization in close by future, which could compel it into the liquidation. The authority even could ought to down the organization.

In this manner the current investors are potentially dumpling the offers , cause the stock costs to fall.