Case Study Business Essay

651 Words Jul 2nd, 2012 3 Pages
To: Mr. V.Morrison, CEO, Caledonia Products

From: Julien Thizeau-Amir-Sadri, Applicant for the position of Financial Analyst

Date: May 31, 2012

Subject: A test of my understanding of basic financial concepts and tax code

The appropriate goal for the firm is the maximization of shareholders' wealth (maximization of the market value of common stock) because it includes the effects of all financial decisions. Indeed, with poor investment or dividend decisions will cause a fall in the total value of the firm's stock and on the other hand, good decisions will push the price of the stock upward. In this way all financial decisions are evaluated, and all financial decisions affect shareholder wealth.

Investors
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This means we can implement our goal of maximization of shareholder wealth by focusing on the effect each decision should have on the stock price all else held constant.
(Principle 4 : Market prices are generally right)

The agency problem is the result of the separation of management and the ownership of the firm. As a result managers may make decisions that are not in line with the goal of maximization of shareholder wealth. To control this problem we monitor managers and try to align the interests of shareholders and managers. The interests of shareholders and managers can be aligned by setting up stock options, bonuses, and perquisites that are directly tied to how closely management decisions coincide with the interest of shareholders.
(Principle 5 : Conflicts of interest cause Agency problems)

Ethical errors are not forgiven in the business world. Business interaction is based upon trust and there is no way that trust can be eliminated quicker than through an ethical violation. Examples of Enron, WorldCom, and Arthur Anderson illustrate this fact. As a result acting in an ethical manner is not only morally correct, but it is a necessary ingredient to reach our goal of maximization of shareholder wealth.

There are three legal forms of business organization:
- A sole proprietorship is a business owned by a single individual who maintains complete title to the

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