Chapter 1 Case.1:

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 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 earnings!” 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.

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? Explainc. Does the firm appear to have an effective corporate governance structure?

Explain any shortcomings.d. On the basis of the information provided, what specific recommendations

would you offer the firm?

Chapter 1 Case.2:

In 1969, Tom Warren founded East Coast Yachts. The company’s operations are located near Hilton Head Island, South Carolina, and the company is structured as a sole proprietorship. The company has manufactured custom midsize, high-performance yachts for clients, and its products have received high reviews for safety and reliability. The company’s yachts have also recently received the highest award for customer satisfaction. The yachts are primarily purchased by wealthy individuals for pleasure use, Occasionally, a yacht is manufactured for purchase by a company for business purposes. The custom yacht industry is fragmented, with a number of manufacturers. As with any industry, there are market leaders, but the diverse nature of the industry ensures that no manufacturer dominates the market. The competition in the market, as well as the product cost, ensures that attention to detail is a necessity. For instance, East Coast Yachts will spend 80 to 100 hours on hand-buffing the stainless steel stem-iron, which is the metal cap on the yacht’s bow that conceivably could collide with a dock or another boat. Several years ago, Tom retired from the day-to-day operations of the company and turned the operations of the company over to his daughter, Larissa. Because of the dramatic changes in the company, Larissa has approached you to help manage and direct the company’s growth. Specifically, she has asked you to answer the following questions.

a) What are the advantages and disadvantages of changing the company organization from a sole proprietorship to an LLC?

b) What are the advantages and disadvantages of changing the company organization from a sole proprietorship to a corporation?

c) Ultimately, what action would you recommend the company undertake? Why?

Chapter 1 Case.3:

In early 2007, Ali and Adnan formed the ABC Cake Company. The company produced a full line of cakes, and its specialties included chess cake, lemon pound cake, and double-iced, double-chocolate cake. The couple formed the company as an outside interest, and both continued to work at their current jobs. Ali did all the baking, and Adnan handled the marketing and distribution. With good product quality and a sound marketing plan, the company grew rapidly. In early 2012, the company was featured in a widely distributed entrepreneurial magazine. Later that year, the company was featured in Gourmet Desserts, a leading specialty food magazine. After the article appeared in Gourmet Desserts, sales exploded, and the company began receiving orders from all over the world.

Because of the increased sales, Ali left his other job, followed shortly by Adnan. The company hired additional workers to meet demand. Unfortunately, the fast growth experienced by the company led to cash flow and capacity problems. The company is currently producing as many cakes as possible with the assets it owns, but demand for its cakes is still growing. Further, the company has been approached by a national supermarket chain with a proposal to put four of its cakes in all of the chain’s stores, and a national restaurant chain has contacted the company about selling ABC cakes in its restaurants. The restaurant would sell the cakes without a brand name.

Ali and Adnan have operated the company as a sole proprietorship. They have approached you to help manage and direct the company’s growth. Specifically, they have asked you to answer the following questions:

a) What are the advantages and disadvantages of changing the company organization from a sole proprietorship to an LLC?

b) What are the advantages and disadvantages of changing the company organization from a sole proprietorship to a corporation?

Ultimately, what action would you recommend the company undertake? Why?

Chapter 1 Group Case 1:

Group Exercise

You may not recall it, but in kindergarten one yardstick of your development was summarized as “plays well with others.” As you moved through your school years, this explicit characteristic was deleted, and you were graded based on your attainment of more concrete learning goals such as addition, spelling, and, eventually, logical thinking. Of course, playing well—getting along with others—is not a skill that disappears along with our baby teeth. Humans are social animals, and as such we spend much of our day in close proximity to other people. This is particularly true in the workplace. Most jobs include at least some component of teamwork. Working well within groups is necessary for success in most firms. With this fact in mind, in each chapter you will be asked to complete a group assignment linked to the learning goals of each chapter. The size of the groups is flexible, although groups of 3 to 5 students are probably most appropriate. These assignments will be continuous in the sense that the groups will be establishing a firm and, in each chapter, will attempt to simulate decisions made by corporations in their normal course of financial management. The group assignments begin with this chapter, and each subsequent chapter will build on your previous work. Your group must first form a fictitious partnership. Assume that this partnership has existed for several years and is in the process of going public. This “firm-group” will continue throughout the semester. You will also follow a real, publicly traded firm throughout the semester, which should be related in some way to your fictitious business.

To Do

a. Name your firm, describe the business it is in, and state what advantages you (as management) see in going public.

b. Discuss the necessary managerial roles of your fictitious firm, and explain the responsibilities for each within the firm. (Although individual roles could be assigned here, the group is responsible for all parts of all assignments.)