Chapter 1
• Problems 2
Explain several dimensions of the shareholder-principal conflict with manager-agent known as the principal-agent problem. To mitigate agency problems between senior executives and shareholders, should the compensation committee of the board devote more to executive salary and bonus (cash compensation) or more to long-term incentives? Why? What role does each type of pay play in motivating mangers?

The dimensions of the principal agent problem are:

Principals lack of knowledge, skill, time than agent.
The objective for principal and agent is difficult to align. Normally agent is looking for present value, principal is looking for long term return.

Compensations committee should design a salary or bonus formula that can satisfy agent’s expectation. For example, if any investment decrease the present value but increase the long term value that should be considered to manager’s contribution and be reward in a monetary way. Therefor, manager would not radically to seek present value.
The salary plays a role of manager’s daily work.
The bonus plays a role of manager’s operation performance. Bonus should motivate manager’s decision for long term and short term consideration.

• Problems 3
Corporate profitability declined by 20% from 2008 to 2009. What performance percentage would you use to trigger executive bonuses for that year? Why? What issues would arise with hiring and retaining the best managers?

If the corporate profitability declined by 20% in 2008 to 2009, we need to look into not only the performance of company, 2008 is the start of global financial crises. The business environment is declining therefor should consider that fact. HR should perform a performance appraisal to executives to identify what is the reason of business declined. When hiring and retaining the managers those identified area should be considered.

• Problems 6
In the context of the shareholder wealth-maximization model of a firm, what is the expected impact of each of the following events on the value of the firm? Explain why.
a) New foreign competitors enter the market. The value of firm should decrease, because your business is shared with competitor.
b) Strict pollution control requirements are enacted. The control is apply to all the companies so your business value should remain the same
c) A previously nonunion workforce votes to unionize. Management could face the legal issue and workforce could strike with union value of firm decreases.
d) The rate of inflation increases substantially. If the inflation increases substantially firm’s cash will decrease therefor decrease the value.
e) A major technological breakthrough is achieved by the firm, reducing its costs of production. That increases the firm value by reducing the cost of production.
Chapter 2 • Problems 1
For each of the determinants of demand in Equation 2.1, identify an example illustrating the effect on the demand for hybrid gasoline-electric vehicles such as the Toyota Prius. Then do the same for each of the determinants of supply in Equation 2.2. In each instance, would equilibrium market price increase or decrease? Consider substitutes such as plug-in hybrids, the Nissan Leaf and Chevy Volt, and complements such as gasoline and lithium ion laptop computer batteries.

Toyota Prius. Demand and supply determine the equilibrium market price
When the gasoline price raises the hybrid car’s demand increase. Depend on the quantity of production of Toyota in a period the price can be quoted. When the competence comes in like Nissan or Chevy the market has more suppliers, the demand could decreases therefor the price goes down. The price also affected by the production material as lithium ion, if the batteries’ price increase too much that would increase or decreases the price. • Problems 5
Two investments have the following expected returns (net present values) and standard deviation of returns:
Project Expected Returns Standard Deviation
A $50,000 $40,000
B $250,000 $125,000
Which one is riskier? Why?
A is riskier. Because A has 0.8% and B only has 0.5%.
•
Problems 6
The manager of the aerospace division of General Aeronautics has estimated the price it can charge for providing satellite launch services to commercial firms. Her most optimistic estimate (a price not expected to be exceeded more than 10 percent of the time) is $2 million. Her most pessimistic estimate (a lower price than this one is not expected more than 10 percent of the time) is $1 million. The expected value estimate is $1.5 million. The price distribution is believed to be approximately normal.
a. What is the expected price?

1.5 million
b. What is the standard deviation of the launch price?
 v=0.8 c. What is the probability of receiving a price less than $1.2 million?
10%