...The Goal of the Firm Ereeka Ortega Managerial Economics September 8, 2015 Dr. McCoskey Abstract Since the Affordable Care Act insurance laws have changed drastically. The question today is do insurance companies make a profit off their customers? In this paper I will discuss Freidman’s goal of the firm. Milton Freidman felt as though the goal of the firm was to keep the shareholders at the front line of their decisions. When an insurance company decides what they are going to do to target their customers they make sure that they are going to have a profit so that the shareholders are happy. Another aspect of this paper is going to be on whether or not the government should have a role in the goal of the firm rights of those involved seem to be taken away. The Goal of the Firm The Friedman goal of the firm is that they take the shareholder into consideration when it comes to a profit. He believes that the sole purpose of the goal is to make sure that profits are maximized so that a portion of that profit can be provided to the shareholders, especially if there is a risk in the investment of the company. Not only does Friedman believe that the goal of the firm is to gain a profit for the shareholder but to not have any social responsibilities. In his book Capitalism and Freedom Friedman talks about totalitarianism, which is where the state has control over all aspects of the public and private...
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...PART I - INTRODUCTION Chapter 1 Introduction and Goals of the Firm Managerial economics is that part of economics applied to the decisions that managers must make. When managers make decisions that maximize firm profits, they simultaneously maximize shareholder wealth and promote efficient allocation of resources. Managers drift away from this objective when they concentrate on their own security. To avoid non-profit maximizing behavior, a growing number of firms are structuring compensation plans for managers that promote long-term profitability. Shareholder Wealth Maximization 1. To align the interests of the shareholders of Salomon Smith Barney with the interests of its chairman, most of the chairman's compensation is based on the performance of the company relative to its five major competitors. 2. Executive compensation is based on Salomon' return on equity and return on equity of their competitors. The bonus can be as large as $24 million. Managerial Economics and Economic Theory 1. Managerial Economics deals with applications of microeconomics. It is useful for making business decisions concerning pricing, production, cost analysis, market structure, and strategy. 2. Honda and Toyota both expanded capacity to produce cars in the US. The decision is either to expand (S1) or not expand (S2). Both firms believe that the capacity expansion was profitable. 3. Steps in decision making include: Establish and identify...
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...Chapter 15 Current Liabilities Management ( Learning Goals 1. Review the key components of credit terms, accounts payable, and the procedures for analyzing them. 2. Understand the effects of stretching accounts payable on their cost and on the use of accruals. 3. Describe interest rates and the basic types of unsecured bank sources of short-term loans. 4. Discuss the basic features of commercial paper and the key aspects of international short-term loans. 5. Explain the characteristics of secured short-term loans and the use of accounts receivable as short-term-loan collateral. 6. Describe the various ways in which inventory can be used as short-term-loan collateral. ( True/False 1. Accounts payable are spontaneous secured sources of short-term financing that arise from the normal operations of the firm. Answer: FALSE Level of Difficulty: 1 Learning Goal: 1 Topic: Accounts Payable 2. Notes payable can be either spontaneous secured or spontaneous unsecured financing and result from the normal operations of the firm. Answer: FALSE Level of Difficulty: 1 Learning Goal: 1 Topic: Notes Payable 3. Accounts payable result from transactions in which merchandise is purchased but no formal note is signed to show the purchaser’s liability to the seller. Answer: TRUE Level of Difficulty: 1 Learning Goal: 1 Topic: Accounts Payable 4. In credit terms, EOM (End-of-Month) indicates that the accounts...
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...retrieval system, or transmitted in any form or by any means – electronic, mechanical, photocopying, recording or otherwise – without the permission of CEIBS The CEIBS Case Centre is sponsored by McKinsey & Company. Dynamic Strategic Alignment CC-307-017 Dynamic Strategic Alignment This note introduces the concepts and frameworks that are commonly used in strategic analysis, integrating them within an on-going process of creating and improving strategic alignment. 1. FUNDAMENTALS The objective of strategic management is to create alignments—within the firm and between the firm and its environment—that give the firm competitive advantage and enable it to achieve its goals. Strategic change, therefore, is fundamentally a decision about what changes to make in order to create or improve alignment that moves the firm closer to its goals. Managers may increase alignment and performance by a) changing elements of the firm, b) changing features of the environment in which operate, or c) shifting to another environment. There will usually be multiple options, and managers must decide which changes are necessary, possible and worth the effort required. When making a change of any type, there will usually be a temporary period of adjustment during which performance may actually drop. If the change was appropriate, however, this should be followed by an increase in competitiveness and performance. Managers may intentionally create mis-alignments as they pursue growth, whether expanding...
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...UNIVERSITY COLLEGE OF MANAGEMENT STUDIES RESEARCH TOPIC: MANAGEMENT OF EMPLOYEES’ RESISTANCE TO ORGANIZATIONAL CHANGE BY DUMEVI ANDREW YAO AC/07-2/DS/1070 SUPERVISOR: MR. ROBERT MWIN CHAPTER ONE INTRODUCTION 1.0 BACKGROUND Organizations perceive change as very important for their survival and prosperity in today’s competitive environment. They make change initiative to keep up the pace with changing environment. The success and performance superiority of organizations are very much dependent on its ability to align its internal arrangement with the demand of external world. It is also recognized that as humans as we are adapting to change is very difficult more especially when it affects our comfort. Notwithstanding, change can also be accepted provided it’s well interpreted to be well understood. Management of employees’ resistance towards organizational change is one of the major problems/threats to successful change programme.My first step after discovering employee’s resistance towards organizational change management led me to the exploration of causes of resistance which have been thought by different authors as very important for overcoming it. According to Mintzberg, the cure might actually prove to be just more of the cause (Mintzberg 1998). On the other hand, organizations of today operate under increasing demands for change. The market has radically changed due to globalization, strong competition, technical development and a customer-driven...
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...credit terms, and credit monitoring. Understand the management of receipts and disbursements, including floats, speeding collections, slowing payments, cash concentration, zero-balance accounts, and investing in marketable securities. True/False 1. A firm that is unable to pay its bills as they come due is technically insolvent. Answer: TRUE Level of Difficulty: 1 Learning Goal: 1 Topic: Basics of Short-Term Financial Management 2. The short-term financial management is concerned with management of the firm’s current assets and current liabilities. Answer: TRUE Level of Difficulty: 1 Learning Goal: 1 Topic: Basics of Short-Term Financial Management 45 Gitman • Principles of Finance, Eleventh Edition 3. In the short-term financial management, the goal is to manage each of the firm’s current assets and current liabilities in order to achieve a balance between profitability and risk that contributes to the firm’s value. Answer: TRUE Level of Difficulty: 1 Learning Goal: 1 Topic: Basics of Short-Term Financial Management 4. Working capital represents the portion of the firm’s investment that circulates from one form to another in the long-term conduct of business. Answer: FALSE Level of Difficulty: 1 Learning Goal: 1 Topic: Working Capital...
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...Chapter 1 The Financial Manager and the Firm Learning Objectives 1. Identify the key financial decisions facing the financial manager of any business firm. 2. Identify the basic forms of business organization used in the United States, and review their respective strengths and weaknesses. 3. Describe the typical organization of the financial function in a large corporation. 4. Explain why maximizing the current value of the firm’s stock price is the appropriate goal for management. 5. Discuss how agency conflicts affect the goal of maximizing stockholder wealth. 6. Explain why ethics is an appropriate topic in the study of corporate finance. I. Chapter Outline 1.1 The Role of the Financial Manager A. It’s All about Cash Flows • The financial manager is responsible for making decisions that are in the best interest of the firm’s owners. • A firm generates cash flows by selling the goods and services produced by its productive assets and human capital. After meeting its obligations, the firm can pay the remaining cash, called residual cash flows, to the owners as a cash dividend, or it can keep the money and reinvest the cash in the business. • A firm is unprofitable when it fails to generate sufficient cash flows to pay operating expenses, creditors, and taxes. Firms that are unprofitable over time will be forced into bankruptcy by their creditors. In bankruptcy, the company will be reorganized, or the company’s...
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...Prior to this book, neo-classical economists assumed that firms sought to maximize profits and operated with perfect knowledge. These two assumptions are the first questioned by the authors especially due to the fact that there are sociological and psychological certainties that are left out by the classical approach about the firm. Now going through the author’s major theory which has the basic models: The Organizational goal, Expectations and decisions of an organization and Relational concepts. The goal of an organization The authors’ state that individual person has goal, as an organization they do not. However, if the theory is to be well defined, there is need for a goal for the organization, or a corresponding equivalent to that of an individual. The authors adopt a series of independent constraints forced on the organization through negotiation among the bloc members and adjusted over time in response to strains within. For the goal analysis, the authors adopt two organizing devices. The first setoff exhaustive variables influencing the dimensions of the goal while the second set of relational concepts influences the aspiration on a particular goal. The second set is made of past performances, goals of the organization and of others. Though the author state conflicting goals exist in firms, they do not solve the problem given that for maximization problem we can use Lagrange Multiplier or constraints to the objective function directly. Expectations and decisions...
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...had actually already begun initiatives to allow shareholders a say on pay before Congress got involved. On May 5, 2008, Aflac, the insurance company with the well-known “spokesduck,” held the first shareholder vote on executive pay in the United States. Understanding how a corporation sets executive pay, and the role of shareholders in that process, takes us into issues involving the corporate form of organization, corporate goals, and corporate control, all of which we cover in this chapter. 1.1 What Is Corporate Finance? Suppose you decide to start a firm to make tennis balls. To do this you hire managers to buy raw materials, and you assemble a workforce that will produce and sell finished tennis balls. In the language of finance, you make an investment in assets such as inventory, machinery, land, and labor. The amount of cash you invest in assets must be matched by an equal amount of cash raised by financing. When you begin to sell tennis balls, your firm will generate cash. This is the basis of value creation. The purpose of the firm is to create value for...
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...Solutions to Chapter 1 Goals and Governance of the Corporation 1. What are the differences between a corporation and a sole proprietorship? A corporation is a distinct legal entity, separate from its owners (i.e., stockholders). The stockholders have limited liability for the debts and other obligations of the corporation. The liability of the individual stockholder is generally limited to the amount of the stockholder’s investment in the shares of the corporation. Creation of a corporation is a legal process that requires the preparation of articles of incorporation. On the other hand, a sole proprietorship is not distinct from the individual who operates the business. Therefore, the sole proprietor (i.e., the individual) directly owns the business assets, manages the business, and is personally responsible for the debts of the sole proprietorship. 2. What do we mean when we say that corporate income is subject o double taxation? Double taxation means that a corporation’s income is taxed first at the corporate tax rate, and then, when the income is distributed to shareholders as dividends, the income is taxed again at each shareholder’s personal tax rate. 3. Explain why each of the following may not be appropriate corporate goals. a. Increase market share b. Minimize costs c. Underprice any competitors d. Expand profits Increased market share can be an inappropriate goal if it requires reducing prices...
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...well planed and followed expansions/global strategy. One important fact is to focus on the main objective of any firm; “Maximizing shareholder value” any strategy is mostly designed and built around this objective. To evaluate and review the strategies presented in this chapter two current events are visited at the end of the paper; Nokia’s cost reduction strategy and Hollywood’s Global Expansion strategy. Hollywood for one is focused on the global market and the ability to successfully expand through these markets, since 1980s as mentioned by Jeff Kleeman the executive producer of “The Change-Up” (Lang, 2011) Hollywood were targeting the global market but now they are more focused on the how rather than just the revenues from these global markets. Nokia’s global strategy on the other hand is aligning workforce with site operations. Nokia is one of the successful telecommunication companies worldwide with more than a billion users worldwide. (Nokia Corporation, 2011) Chapter Summary The Strategy of International Business chapter reviews some basic principles of international business strategies and how these strategies can be used to profit from international expansions. The chapter defines strategy as “the actions managers take to attain the goals of the firm” (Hill, 2011, p. 402). The chapter is divided in few sections as follows: Strategy and the Firm, in which the author discusses how a firm’s profitability can be maximized by following one or more of the business...
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...International Journal of Physical Distribution & Logistics Management Connecting strategy‐linked outsourcing approaches and expected performance Barry Brewer Bryan Ashenbaum Jeffrey A. Ogden Article information: To cite this document: Barry Brewer Bryan Ashenbaum Jeffrey A. Ogden, (2013),"Connecting strategy#linked outsourcing approaches and expected performance", International Journal of Physical Distribution & Logistics Management, Vol. 43 Iss 3 pp. 176 - 204 Permanent link to this document: http://dx.doi.org/10.1108/IJPDLM-10-2011-0175 Downloaded on: 22 November 2014, At: 23:44 (PT) References: this document contains references to 98 other documents. To copy this document: permissions@emeraldinsight.com The fulltext of this document has been downloaded 614 times since 2013* Downloaded by INDIAN INSTITUTE OF FOREIGN TRADE At 23:44 22 November 2014 (PT) Users who downloaded this article also downloaded: Pamela Kent, (2011),"The decision to outsource management advisory services", Managerial Auditing Journal, Vol. 26 Iss 8 pp. 672-696 Jane C. Linder, Martin I. Cole, Alvin L. Jacobson, (2002),"Business transformation through outsourcing", Strategy & Leadership, Vol. 30 Iss 4 pp. 23-28 Kate Vitasek, Karl Manrodt, (2012),"Vested outsourcing: a flexible framework for collaborative outsourcing", Strategic Outsourcing: An International Journal, Vol. 5 Iss 1 pp. 4-14 Access to this document was granted through an Emerald subscription provided by 446474 [] For Authors ...
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...Q. Explain why profit maximization is not the best goal for company what is an appropriate goal and why? Some people believe that the manager’s main goal always should be to try to maximize profits. To do it, they should take only those actions that expected to increase revenues more than costs. It means maximizing in EPS (Earning Per Share). It seems a reasonable objective but as a goal suffers from several flaws: * First of all, figures for EPS are always historical so reflect past performance rather than what is happening now or what will happen in the future. If you as a manager seek only to maximize profits in a limited period, you may ignore the timing of those profits. Large profits that pay off many years in the future may be less valuable than smaller profits received next year. * Second, Different accounting principles result differences in profit computing. It means when firms compute profits, they follow certain accounting principles which focus on accrued revenues and costs. A firm that is profitable according to accounting principles may spend more cash that it receives and an unprofitable firm may have larger cash inflows than outflows. There is a famous expression in finance saying:” you cannot pay your bills with earning, only with cash!!” In finance, we place more emphasis on cash than on profit or earning. * Finally, as a manager you have to include variability or risk. Focusing only on earning may ignore them. When comparing two investment opportunities...
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...whether to expand a manufacturing plant), capital structure (deciding whether to issue new equity and use the proceeds to retire outstanding debt), and working capital management (modifying the firm’s credit collection policy with its customers). Q1.5 Goal of Financial Management. What goal should always motivate the actions of the firm's financial manager? To maximize the current market value (share price) of the equity of the firm (whether it’s publicly traded or not). Q1.6 Agency Problems. Who owns a corporation? Describe the process whereby the owners control the firm's management. What is the main reason that an agency relationship exists in the corporate form of organization? In this context, what kinds of problems can arise? In the corporate form of ownership, the shareholders are the owners of the firm. The shareholders elect the directors of the corporation, who in turn appoint the firm’s management. This separation of ownership from control in the corporate form of organization is what causes agency problems to exist. Management may act in its own or someone else’s best interests, rather than those of the shareholders. If such events occur, they may contradict the goal of maximizing the share price of the equity of the firm. Q1.7 Primary versus Secondary Markets. You've probably noticed coverage in the financial press of an initial public offering (IPO) of a company's securities. Web search company Google is a relatively recent example. Is an IPO a primary-market transaction...
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...1. Multinational Corporations(MNCs) 1) Definition: firms that engage in some form of international business. 2) The goals of MNCs: maximizing the value of the MNCs and shareholder wealth. 2. Agency problems 1) Agency problems: The conflict of goals between a firm’s managers and shareholders is often referred to as the agency problem. 2) Agency costs are normally larger than for purely domestic firms for several reasons (1) MNCs with subsidiaries scattered around the world may experience larger agency problems because monitoring managers of distant subsidiaries in foreign countries is more difficult. (2) Foreign subsidiary managers raised in different cultures may not follow uniform goals. (3) The sheer size of the larger MNCs can also create large agency problems. (4) Some non-U.S. managers tend to downplay the short-term effects of decisions. 3) The parent corporation of an MNC may be able to prevent agency problems with proper governance. (1) Communicating the goals for each subsidiary to ensure that all subsidiaries focus on maximizing the value of the MNC rather than their respective subsidiary values. (2) Overseeing the subsidiary decisions to check whether the subsidiary managers are satisfying the MNC’s goals. (3) Implanting compensation plans such as stocks that reward the subsidiary managers who satisfy the MNC’s goals. 4) The ways to reinforce corporate governance of MNCs. (1) Establishing a centralized database...
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