Assessing the Goal of Sports Products, Inc. Loren Seguara and Dale Johnson both work for Sports Products, Inc., a major producer of boating equipment and accessories. Loren works as a clerical assistant in the Accounting Department, and Dale works as a packager in the Shipping Department. During their lunch break one day, they began talking about the company. Dale 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 $2.00 per share over the past 9 months. Loren indicated that she shared Dale'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. Loren 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. Dale said, "That doesn't make sense, because the stockholders own the firm. Shouldn't management do what's best for stockholders? Something's wrong!" Loren 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 stockholders therefore don't directly benefit from profits. The only way we benefit is for the stock price to rise." Dale chimed in, "That probably explains why the firm is being sued by state and federal environmental officials for dumping pollutants in the adjacent stream. Why spend money for pollution control? It increases costs, lowers profits, and therefore lowers management's camings!" Loren and Dale realized that the lunch break had ended and they must quickly return to work. Before leaving, they decided to meet the next day to continue their discussion. To Do 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. a. What should the management of Sports Products, Inc., pursue as its overriding goal? Why? (Select all the choices that apply.) O A. Maximization of shareholder wealth, which means maximization of share price, should be the primary goal of the firm. B. Unlike profit maximization, maximization of shareholder wealth considers 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 they decide to sell their shares. c. Maximization of the firm's profits, which means maximization of share price, should be the primary goal of the firm. OD Unlike maximization of shareholder wealth, maximization of the firm's profits considers, 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 they decide to sell their shares. b. Does the firm appear have an agency problem? Explain. (Select all the choices that apply.) O A. Yes, there appears to be an agency problem. Although compensation for management is tied to profits, it is not directly linked to share price. B. Management's actions with regard to pollution controls suggest a profit maximization focus, which would maximize their earnings, rather than an attempt to maximize share price. Click select your answer(s)
