Question #1

Read the following case carefully, then give the answer of the questions given below.

The case is:

Management Vs Shareholders
Answer:

1. Identify the principal financial policies being debated:

The principal financial policies being debated was the role of the financial management, goal of the firm,
corporate governance and the organization of the financial management function. These are some of the
policies that were being debated in the discussion.

2. Considering the perspective of management only, what tendencies do you see in each of these
financial policies?

The basic perspective of the management is the concern of acquisition, financing and management of the
asset with some overall goal in mind. There were basically three goals that were clearly in the mind of
management. These are:

i. What is the optimal firm size?

ii. What specific assets should be required?
iii. Which kind of the asset should be reduced or eliminated?

It’s up to the management that how should be these policies financed to improve the tendencies of the
firm. The responsibility of the management is to utilize the existing resources efficiently and financial
managers have to vary the operating responsibilities of the assets.

3. Considering the perspective of shareholders only, what tendencies do you see in each of these
financial policies?

Shareholders only try to take interest on the maximization of their wealth and value creation only occurs
when we maximize the share price for current shareholder. These policies should be introduced for the
maximization of the shareholder interest. This will help to strength the shareholder wealth in the
organization shares.

4. The Mustafa Company’s creditors are not directly mentioned in the case, but what do you think
their preferences would be with regard to each of the financial policies?

The basic perspective of the management is the concern of acquisition, financing and management of the
asset with some overall goal in mind. But however the management should have some preferences
towards social and corporate interest. These preferences help them to strengthen the worth of the firm.
Wealth maximization does not preclude the firm from being socially responsible assume that we view the
firm as producing both the private and social goods while keeping in mind to maximize the shareholder
profit. These policies will help the firm to strengthen its corporate governance.

5. Use some ideas of your own to indicate how Mustafa Company’s shareholders might persuade
management to move in the direction of shareholders’ preferences:

Management should make such policies which will enhance the rights of the shareholders. Management
should entitle to share in the earnings of the company only if cash dividends are paid. Management
should also enhance the rights to purchase the new shares which will be designed the corporate charter of
state may provide current shareholder with a preemptive right, which requires that these shareholders be
the first offered any new issue of common stock or an issue that can be converted in common stock.
Management should enhance the voting rights of the shareholder because the shareholders are the owners
of the firm and they are entitled to the board of directors.