Shareholders want high long-term profits. Managers want job security and wonderful perks and amenities. Since risk and return tend to be positively related, managers may wish to avoid risks that shareholders want the managers to undertake. To encourage mangers to take on risks, compensation committees can place a greater weight of their compensation on long-term incentives such as stock, options to buy stock, and bonus based on surpassing the performance of comparable firms over several years. When all of the compensation is cash, managers wish to start only low risk projects to avoid making any mistakes and stay away from higher risk, potentially high-valued projects.
If Corporate profitability was to decline by 20 percent from 2008 to 2009. The shareholder wealth is used as an indicator to check whether it is increased or not. When the bonus is tied to ...view middle of the document...
If the impact of the requirements is substantially different from one firm to another in an industry, the value of some firms may be enhanced relative to those at a competitive disadvantage because of the standards.
C) If the union is effective in raising wages without improving productivity, then the value of the firm decreases. However, labor costs may rise but be offset by increases in productivity, then the change in the value of the firm depends on which increased more, wages and productivity.
D) Inflation tends to increase costs and increase prices. The full impact is indeterminate depending on the ability of the firm to pass along higher costs to consumer and on the specific impact of inflation on a firm’s basis.
E) Lower costs, other things equal, will raise the value of the firm. At some point, competitors eventually also adopt this new technology.
General Demand Function
The six principal variables that influence the quantity demanded of a good or service are (1) the price of the good or service, (2) the incomes of consumers, (3) the prices of related goods and services, (4) the tastes or preference patterns of consumers, (5) the expected price of the product in future periods, and (6) the number of consumers in the market. The relation between quantity demanded and these six factors is referred to as the general demand function and is expressed as follows:
Q (d) = quantity demanded of the good or service
P = price of the good or service
M = consumers’ income (generally per capita)
PR = price of related goods or services
P (e) = expected price of the good in some future period
N = number of consumers in the market
Product A is more risky as standard deviation/means=0.8 and for product B it is 0.5 thus A is more risky.
Coefficient of variation of Product A 40,000/50,000 x 100 = 80%
Product B = 125,000/250,000x100 = 5%
1.285= (value-mean) standard deviation. The mean is given as 1.5 which is also the expected price so the standard deviation. Works to be .389 This means the profitability of getting less than 1.2 million is 22.9%