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Assessing The Goal Of Sports Products, Inc.

1121 words - 4 pages

Running head: TEXT CASE STUDY 1 TEXT CASE STUDY PAGE \* Arabic \* MERGEFORMAT 2
Assessing the Goal of Sports Products, Inc.FIN/419: Finance for Decision MakersAssessing the Goal of Sports Products, Inc.Many people believe that the primary objective of a firm is to maximize profits. Sports Products, Inc. is a firm who has followed this practice during its 20 year history. The management of Sports Products, Inc. has concentrated on maximizing profits while ignoring other critical factors. Management's decision to maximize profits has created issues with its overriding goal, agency problem, approach to pollution control, and corporate governance. In order for Sports Products, Inc. to resolve the issues, changes need to be made in the way it operates.Overriding GoalThe primary goal of a firm should be to achieve the objectives of its owners, also known as shareholders; therefore, management of Sports Products, Inc. should pursue maximizing shareholder wealth as its overriding goal. The current objective of Sports Products, Inc. has been to maximize profits, but "profits do not necessarily result in cash flows available to the stockholders" (Gitman, 2006, p. 15). Owners only receive cash flow when receiving dividends or selling their shares for a higher price than when first purchased; Sports Products, Inc. has failed to pay dividends in its 20 year history. Although profits may increase earnings per share, higher earnings per share do not increase stock prices unless accompanied by increased future cash flows. A decrease in future cash flow may result in decreased share price. The price of Sports Products, Inc.'s stock has declined nearly $2 per share over the past nine months. Because share price has decreased and "share price represents the owners' wealth in the firm" (Gitman, 2006, p. 15), Sports Products, Inc. is failing to achieve the objectives of its owners. Pursuing the goal of maximizing shareholder wealth can lead to increased investor confidence, investments, cash flows, share price, and ultimately profits.Agency ProblemThe owners of Sports Products, Inc. rely of management, as their agents, to make decisions during the course of operations that will achieve the owners' objectives. The owners' objectives are to maximize wealth, which is measured be the share price of stock. In maximizing profits, it appears that Sports Products, Inc. has created agency problem. The firm has a profit-sharing plan under which all managers are partially compensated on the basis of the firm's profits. The profit-sharing plan has created an issue in which managers are placing personal goals ahead of the owners' goals. Dumping of pollutants in the adjacent stream demonstrates that management has made decisions in their own personal interests to decrease costs and increase profits, thus increasing management earnings. Management's decisions were based on the results that were expected to make a major contribution to the firm's overall profits, rather than the...

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