Case Analysis: Assessing the Goal of Sports Products, Inc.

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Case Analysis: Assessing the Goal of Sports Products, Inc.

Submitted by: Group 1

Acebedo, Gladys

Bandiola, Penuel

Bautista, Jherwienne

Cruz, Abbie

Inojales, Geraldine

Miguel, Gen

Pili, Lian

Reyes, Alyssa

Susaya, Jennylyn

Tondo, Elma

Submitted to:

Prof. Jenely P. Sabio-Almirol

December 5, 2011

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

The management of Sports Products Inc. should pursue maximization of shareholders’ wealth as its paramount goal. As far as we know, the stockholders are the owners of the firm and the ones bearing the most risk in running it. In line with this, the board of directors and/or the management is elected to take charge of the resources of the aforementioned party. As you see, it is plausible for the shareholders to benefit from the firm – the only way they gain is for the stock price to rise. As per the case, the firm has never paid dividends during its 20-year history. Furthermore, the stock price had declined nearly $2 per share over the past 9 months which doesn’t favor the shareholders at all. Our team deems it necessary to modify the company’s goal.

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

The firm appears to have an agency problem in this case.

The conflict of the contractual relationship between the shareholders and the board of directors is so obvious that even the subordinates began to question the decision-making ability of the financial managers. Manipulations such as the vile treatment to the environment and the so-called pollution control can hardly explain how profit rise and stock price decline at the same period. It appears that [the nature of the agency contract cannot fully prevent the parties from pursuing self-interest upon the expense of the other.1]

[Shareholders’ preferences are to maximize the value of the firm’s equity; Managers prefer to engage in activities that maximize their own return.2] As of current result, the managers’ interest seems to overrule. Therefore neglecting what they are bound to do – to perform service. [1]

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?

With limited information on hand, the team can hardly evaluate the firm’s approach to pollution control. Despite of that, the firm’s desperate measure to save what was left for the community doesn’t appear to be voluntary at all. It actually takes legal actions before the business entity comply with the law. Nevertheless, it seems that they were spending much resource that naturally affects their profitability.

The company’s manner doesn’t look to be ethical. Intended dumping pollutants aside, it violated the law, Presidential Decree 979: Marine Pollution Decree of 1976 [3] in particular. Disposal of wastes that creates a hazard on human health and marine life is the subject of the mentioned decree which is being debased by the firm. Moreover, a life being at stake is lawlessness after all. A business cannot claim to be ethical if it ignores environmental standards.

Incurring the expense to control pollution is in the best interests of the firm’s owners because it guarantees the firm’s long term profits and stock price aggressiveness. It is clear that the shareholders are the risk-averter in this case. They do not seek the government’s and the environmental officials’ attention for it cause very high risk to their business. Being watched by the authorities is the last thing that a business entity would want for it means so much more than the taxes, court cases, other legal appointments and invitations. It means that the life of the business is at stake. Considering this, if the firm doesn’t take the necessary actions there would be too much risk for an investor...
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