Chapter 1 Case.

1:
Assessing the Goal of Sports Products, Inc.
Loren Seguara and Dale Johnson both work for Sports Products,
Inc., a major producer of boating equipment and accessories.
Loren works as a clerical assistant in the Accounting Department,
and Dale works as a packager in the Shipping Department. During
their lunch break one day, they began talking about the company.
Dale complained that he had always worked hard trying not to
waste packing materials and efficiently and cost-effectively
performing his job. In spite of his efforts and those of his coworkers in the department, the firms stock price had declined
nearly $2 per share over the past 9 months. Loren indicated that
she shared Dales frustration, particularly because the firms
profits had been rising. Neither could understand why the firms
stock price was falling as profits rose.
Loren indicated that she had seen documents describing the
firms profit-sharing plan under which all managers were partially
compensated on the basis of the firms profits. She suggested
that maybe it was profit that was important to management,
because it directly affected their pay. Dale said, That doesnt
make sense, because the stockholders own the firm. Shouldnt
management do whats best for stockholders? Somethings
wrong! Loren responded, Well, maybe that explains why the
company hasnt concerned itself with the stock price. Look, the
only profits that stockholders receive are in the form of cash
dividends, and this firm has never paid dividends during its 20year history. We as stockholders therefore dont directly benefit
from profits. The only way we benefit is for the stock price to
rise. Dale chimed in, That probably explains why the firm is
being sued by state and federal environmental officials for
dumping pollutants in the adjacent stream. Why spend money for
pollution control? It increases costs, lowers profits, and therefore
lowers managements earnings! Loren and Dale realized that the
lunch break had ended and they must quickly return to work.
Before leaving, they decided to meet the next day to continue
their discussion.
a. What should the management of Sports Products, Inc.,
pursue as its overriding goal? Why?

b. Does the firm appear to have an agency problem? Explain

c. Does the firm appear to have an effective corporate
governance structure? Explain any shortcomings.
d. On the basis of the information provided, what specific
recommendations would you offer the firm?

Chapter 1 Case.2:
In 1969, Tom Warren founded East Coast Yachts. The companys
operations are located near Hilton Head Island, South Carolina,
and the company is structured as a sole proprietorship. The
company has manufactured custom midsize, high-performance
yachts for clients, and its products have received high reviews for
safety and reliability. The companys yachts have also recently
received the highest award for customer satisfaction. The yachts
are primarily purchased by wealthy individuals for pleasure use,
Occasionally, a yacht is manufactured for purchase by a company
for business purposes. The custom yacht industry is fragmented,
with a number of manufacturers. As with any industry, there are
market leaders, but the diverse nature of the industry ensures
that no manufacturer dominates the market. The competition in
the market, as well as the product cost, ensures that attention to
detail is a necessity. For instance, East Coast Yachts will spend 80
to 100 hours on hand-buffing the stainless steel stem-iron, which
is the metal cap on the yachts bow that conceivably could collide
with a dock or another boat. Several years ago, Tom retired from
the day-to-day operations of the company and turned the
operations of the company over to his daughter, Larissa. Because
of the dramatic changes in the company, Larissa has approached
you to help manage and direct the companys growth.
Specifically, she has asked you to answer the following questions.
a) What are the advantages and disadvantages of changing the
company organization from a sole proprietorship to an LLC?
b) What are the advantages and disadvantages of changing the
company organization from a sole proprietorship to a
corporation?
c) Ultimately, what action would you recommend the company
undertake? Why?

Chapter 1 Case.3:
In early 2007, Ali and Adnan formed the ABC Cake Company. The
company produced a full line of cakes, and its specialties included
chess cake, lemon pound cake, and double-iced, double-chocolate
cake. The couple formed the company as an outside interest, and
both continued to work at their current jobs. Ali did all the baking,
and Adnan handled the marketing and distribution. With good
product quality and a sound marketing plan, the company grew
rapidly. In early 2012, the company was featured in a widely
distributed entrepreneurial magazine. Later that year, the
company was featured in Gourmet Desserts, a leading specialty
food magazine. After the article appeared in Gourmet Desserts,
sales exploded, and the company began receiving orders from all
over the world.
Because of the increased sales, Ali left his other job, followed
shortly by Adnan. The company hired additional workers to meet
demand. Unfortunately, the fast growth experienced by the
company led to cash flow and capacity problems. The company is
currently producing as many cakes as possible with the assets it
owns, but demand for its cakes is still growing. Further, the
company has been approached by a national supermarket chain
with a proposal to put four of its cakes in all of the chains stores,
and a national restaurant chain has contacted the company about
selling ABC cakes in its restaurants. The restaurant would sell the
cakes without a brand name.
Ali and Adnan have operated the company as a sole
proprietorship. They have approached you to help manage and
direct the companys growth. Specifically, they have asked you to
answer the following questions:
a) What are the advantages and disadvantages of changing the
company organization from a sole proprietorship to an LLC?
b) What are the advantages and disadvantages of changing the
company organization from a sole proprietorship to a
corporation?
Ultimately, what action would you recommend the company
undertake? Why?

Chapter 1 Group Case 1:

Group Exercise
You may not recall it, but in kindergarten one yardstick of your
development was summarized as plays well with others. As you
moved through your school years, this explicit characteristic was
deleted, and you were graded based on your attainment of more
concrete learning goals such as addition, spelling, and,
eventually, logical thinking. Of course, playing wellgetting along
with othersis not a skill that disappears along with our baby
teeth. Humans are social animals, and as such we spend much of
our day in close proximity to other people. This is particularly true
in the workplace. Most jobs include at least some component of
teamwork. Working well within groups is necessary for success in
most firms. With this fact in mind, in each chapter you will be
asked to complete a group assignment linked to the learning
goals of each chapter. The size of the groups is flexible, although
groups of 3 to 5 students are probably most appropriate. These
assignments will be continuous in the sense that the groups will
be establishing a firm and, in each chapter, will attempt to
simulate decisions made by corporations in their normal course of
financial management. The group assignments begin with this
chapter, and each subsequent chapter will build on your previous
work. Your group must first form a fictitious partnership. Assume
that this partnership has existed for several years and is in the
process of going public. This firm-group will continue throughout
the semester. You will also follow a real, publicly traded firm
throughout the semester, which should be related in some way to
your fictitious business.
To Do
a. Name your firm, describe the business it is in, and state
what advantages you (as management) see in going public.
b. Discuss the necessary managerial roles of your fictitious
firm, and explain the responsibilities for each within the firm.

(Although individual roles could be assigned here, the group

is responsible for all parts of all assignments.)