Question

The board of directors of UT Wireless, Inc. is considering two compensation plans for the CEO of the company. The first would pay the CEO a salary of $300,000 for the upcoming year. The second would pay the CEO a salary of $150,000 and provide the CEO with a stock option to buy 100,000 shares of stock for $11 per share. The current price per share of UT Wireless, Inc. stock is $9 per share. The stock option expires at the end of the year. Why might shareholders prefer the second payment plan? As part of your answer, calculate the break-even point for the CEO to obtain the same compensation under option two as he or she would under option one.

What is an agency problem? What mechanisms could minimize these problems? Please explain

In the typical corporate form of organization shareholders elect the Board of Directors, which subsequently "hires" managers. In a brief essay, discuss the importance of choosing an external Board of Directors to oversee a firm's management when separating ownership (shareholders) and control (managers). Discuss the concerns of many shareholders with respect to 'chummy' Boards of Directors.

MEGAFRAME COMPUTER COMPANY
Balance Sheet
As of December 31
ASSETS
Cash	$	50,000
Accounts receivable		70,000
Inventory		110,000
Net plant and equipment		220,000
Total assets	$	450,000
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable	$	70,000
Accrued expenses		50,000
Long-term debt		130,000
Common stock		70,000
Paid-in capital		40,000
Retained earnings		90,000
Total liabilities and stockholders' equity	$	450,000

MEGAFRAME COMPUTER COMPANY
Income Statement
For the year ended December 31
Sales (all on credit)	$	875,000
Cost of goods sold		600,000
Gross profit	$	275,000
Sales and administrative expenses		30,000
Depreciation		55,000
Operating profit	$	190,000
Interest expense		25,000
Profit before taxes	$	165,000
Taxes (30%)		49,500
Net income	$	115,500

Please use the tables above to calculate followings ratios and show your work:

(1) Accounts Receivable Days

(2) ROE

(3) Inventory Turnover

(4) Net Profit Margin

(5) ROA

Please use the financial ratios below to evaluate and each company’s performance relative to the other three companies in the industry. Please be more specific.

	Net profit margin	Total asset turnover	Assets-to-Equity Ratio	ROE
Axel Co.	19%	1.53	3.4	98.8%
Blue Co	6%	1.88	1.6	18.0%
Carol Co.	10%	1.00	1.06	10.6%
David Co.	4%	1.11	1.8	8.0%

Answer 1

Agency Problem - The agency Problem is a conflict of Inherent in any relationship where one party is expected to act in another's best intrests in corporate Finance the agency Problem Refers to conflict of intrest between Company's and management and company's stock holders. - There must be principal agent relation ship agency Problem arises due to an incentives and Presence of discretion in task completion minimizing agency Problem - agency problem can be minimiged By Providing Performance Related Incentives to agent. if an agent is paid fixed pay Then he may not da so work according 7ent

to Principal requirements instead if We pay fixed pay + Incentives then there will be less agency Problems Share holders prefera second option because it may Involve resting conditions & it is not a fixed pay in a corporate form of organisation there may be so many share holders. they elect Board of directors To manage the corporate form. i for Better management By skilled people ii) Legal Requirement to appoint directors ii) To act In accordance with The Shareholders Intrest iv) Fo take decissions like Investment, financing, dividend of 1 Portfolio decissions

Account sales Receivable $875,000 days : for 365 days & 70000 - for ? 290 Return on Equity 70000 x 365 – 29.2 days 875000 Net Income Shareholders equity - X100 115500 Inventory turnover * 100 Common stock & paid in capitult Retained earnings 115500 -xloo = 57.75% -) 200000 Ratio - cost of goods sold Average Inventory - 600000 - = 5.454 110ooo = Net Income & 71004 Sales Net Profit margin

115500 x 100 = 13.21. 875000 Return on Assets = . Return Total assets - 115500x100 = 25.675. чSoooo ers co is only with 4% of Net profit margin which is less than the other companies - Return on Equity is higher for anel co which is 98.8% Assets to equity Ratio is tigher for ane co which is 3.4 which provides more security to share - The total asset turnover Ratio compares the sales of a company to its asset Base. The Ratio measures The ability of an organ -sation to efficiently Provide sales Total assets turnover is higher for Blue co which is 1.88 which means that it can efficiently provides sales than others