What are some actions that stockholders can take to ensure that management’s and stockholders’ interests are aligned
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1-3 Suppose three honest individuals gave you their estimates of Stock X’s intrinsic value. One person is
your current roommate, the second person is a professional security analyst with an excellent
reputation on Wall Street, and the third person is Company X’s CFO. If the three estimates differed, in
which one would you have the most confidence? Why?
1-7 Should stockholder wealth maximization be thought of as a long-term or a short-term goal? For
example, if one action increases a firm’s stock price from a current level of $20 to $25 in 6 months and
then to $30 in 5 years, but another action keeps the stock at $20 for several years but then increases it
to $40 in 5 years, which action would be better? Think of some specific corporate actions that have
these general tendencies.
1-8 What are some actions that stockholders can take to ensure that management’s and stockholders’
interests are aligned?
1-11 Edmund Enterprises recently made a large investment to upgrade its technology. Although these
improvements won’t have much effect on performance in the short run, they are expected to reduce
future costs significantly. What effect will this investment have on Edmund Enterprises’ earnings per
share this year? What effect might this investment have on the company’s intrinsic value and stock
1-12 Suppose you were a member of Company X’s board of directors and chairperson of the company’s
compensation committee. What factors should your committee consider when setting the CEO’s
compensation? Should the compensation consist of a dollar salary, stock options that depend on the
firm’s performance, or a mix of the two? If “performance” is to be considered, how should it be
measured? Think of both theoretical and practical (i.e., measurement) considerations. If you were also a
vice president of Company X, might your actions be different than if you were the CEO of some other