Goals, ethics, and agency problems in firm behavior

Ethics and Firm's Goals

Agency Problems: The shareholders of a corporation are its owners, and these oweners control management by electing a board (with most smaller shareholders voting "by proxy" or not really voting at all) that oversees the executive positions in the corporation, who in turn oversee the operations and management of the firm. An agency relationship exists to separate the personal liabilities of the shareholders/owners and the actions/resources of the corporation, which can create significant problems of accountability -- namely, the lack of people that can be held accountable for the corporation.

Goal of the Firm: It is true that managers of a corporation should not focus solely on stock price, as current prices reflect only short-term assessments and do not adequately take into account long-term goals and potentials, but stock price is also an important consideration. The current stock price of a firm affects its long-term capabilities by impacting the amount of capital it is able to generate, and ignoring stock price in the making of decisions could lead to an eventuality where the company is not able to maneuver and take advantage of opportunities, make necessary changes, or grow at an optimum pace.

6. Ethics and Firm Goals: Maximizing stock value can certainly lead to ethical problems, as evidenced in innumerable cases. Recent/ongoing examples include Apple, which had enormous stock gains upon the release of its iPhone, manufactured in highly questionable conditions in China, and many other companies with questionable practices and soaring stocks.

Cash Flow

1. East Coast Yacht's cash flows are best described as imperiled and certainly not efficient or especially beneficial to the company at the current time.

2. The accounting cash flow statement would more accurately reflect the current cash flow at the firm than would the financial cash flow statement.

3. Expansion could indeed be beneficial to the company, but before Larissa starts preparing for greater levels of growth she needs to guide the company towards achieving more consistent returns and more efficient cash flows. The fact that a great deal of total assets are fixed and a great deal of current assets are held in inventory is bad for the company's cash position overall, as it indicates that a great deal of effort is needed to move cash through the company -- to convert cash spent into revenue coming in, in other words. The company appears to be largely funded through the raising of capital through stock and the taking on of long-term debt, and while both of these financing activities are routine for many if not most corporations there also needs to be substantial revenue generation.