Question

Last week, an investigative reporter for a major metropolitan newspaper discovered that the doctors conducting clinical trials of a new cancer treatment drug are also the principal shareholders in Cancer Solutions Inc. (CSI). CSI is the company developing and attempting to market the drug. Upon being interviewed by federal authorities, the doctors acknowledged their conflict of interest but reported that they were sold the shares at a 75% discount by CSI's chief financial officer. The CFO was concerned that CSI might not be able to meet its annual performance objectives and in turn pay his anticipated multimillion-dollar bonus.
Does an agency conflict exist between CSI's CFO and the company's shareholders?
a. Yes; CSI's CFO engaged in unethical conduct to manipulate the firm's short-term earnings and improve the likelihood of receiving his annual bonus.
b. Yes; the shares should not have been sold at a 75% discount, which is price discrimination.
c. No; professionals, such as doctors and professional money managers, would not participate in unethical activities.
d. No; in general, shareholders are satisfied with company officers engaging in any type of legal or illegal activity to ensure the chances of them receiving greater dividend payments.
Which of the following actions will help ease agency conflicts and better align managers' objectives with the firm's shareholder wealth?
a. Pay the manager a combination of salary and stock options (phased in over several years) that reward him or her for consistently increasing shareholder wealth.
b. Pay the manager a large base salary with a huge stock option package that matures on a single date.
Amalgamated Metals Corporation's stockholders are mostly individual investors, and there is relatively little institutional ownership. If several pension and mutual funds were to take large positions in Amalgamated Metals Corporation's stock, direct shareholder intervention would be___________ likely to motivate the firm's management.

Answer 1

Answer:

FIRST QUESTION

A)Yes; CSI's CFO engaged in unethical conduct to manipulate the firm's short-term earnings and improve the likelihood of receiving his annual bonus.

SECOND QUESTION

A)Pay the manager a combination of salary and stock options (phased in over several years) that reward him or her for consistently increasing shareholder wealth.

Explanation:

We are informed from the question about an investigative reporter for a major metropolitan newspaper discovery about the doctors conducting clinical trials of a new cancer treatment drug are also the principal shareholders in Cancer Solutions Inc. And how The CFO was concerned that CSI might not be able to meet its annual performance objectives and in turn pay his anticipated multimillion-dollar bonus.

In this case there is an agency conflict that exist between CSI's CFO and the company's shareholders, this is because the, CSI's CFO engaged in unethical conduct to manipulate the firm's short-term earnings and improve the likelihood of receiving his annual bonus.

Agency conflict in finance, is also regarded as conflict of interest, usually occur between the management and the shareholders of that company, it is conflict that usually emerge when those that are required for certain responsibility like interest of principal decide to divert the the authority for their own benefits. However,agency conflict can be minimized by allowing transparency and some ways.

It should be noted here that the CSI's CFO engaged in unethical conduct to manipulate the firm's short-term earnings and improve the likelihood of receiving his annual bonus which is the reason behind the conflict because he act on his own interest.

SECOND QUESTION,

Which of the following actions will help ease agency conflicts and better align managers' objectives with the firm's shareholder wealth?

From the explanation of Agency conflict from First question it should be noted that there are some actions that will help to ease agency conflicts and better align managers' objectives with the firm's shareholder wealth such

Payment of the manager a combination of salary and stock options (phased in over several years) that reward him or her for consistently increasing shareholder wealth.

The payment of the stock options to the manager will allow selling of stock at agreed price as well as date.

Amalgamated Metals Corporation's stockholders are mostly individual investors, and there is relatively little institutional ownership. If several pension and mutual funds were to take large positions in Amalgamated Metals Corporation's stock, direct shareholder intervention would be______more likely_____ likely to motivate the firm's management