QUESTION

Assessment details for ALL students
Assessment item 2 — CASE STUDY ASSIGNMENT
Due date:

Wednesday of Week 6

Weighting:

Assignment – 20%

Assignment
Objectives
This assessment item relates to the course learning outcomes numbers 1 to 3 as stated on page 1.
Assessment task
This assessment item is designed to enable you to analyse and apply financial management concepts
to given business scenarios.  You have the opportunity to undertake this assignment individually or in
a group of no more than three students.  If you decide to work in a group, your group will submit one
assignment and all the group members will receive the same mark, assuming that all group members
make reasonably equal contribution.  Therefore, you must choose the members of your group
carefully.  If plagiarism or excessive copying is detected by the marker, each student in the group will
be jointly liable and receive a reduced mark or be subject to an academic misconduct charge.
All students are required to submit hardcopies of their assignments in MSWord with completed cover
sheet.
A personalised assessment coversheet is to be completed for your assignment submission. Instructions
for generating your coversheet are at: http://dtls.cqu.edu.au/FCWViewer/getFile.do?id=23407. If
yours is a group assignment on your cover sheet you will also need to indicate the other members of
your group by name and student identification number.
You can include as appendices any excel spread sheets with the formulas used to compute your
results. Thorough referencing of data sources is essential, so that the markers can refer to these during
marking if required. However, you must not include copies either in the text or appendices from or of
data from the sources you used.
If you request an extension for your assignment, there is no guarantee that you will receive your
assignment back before the final examination.
Answer all the questions fully in the following case study. You need to include contemporary
issues, as applicable and as appropriate provide practical solutions to the theoretical discussion.

ASSESSMENT
2
Case Study – Computer Products Limited
Lotus and Michael both work for Computer Products, a major producer of computer equipment,
accessories and software. Lotus position is assistant accountant in the Accounting and Finance
Department, and Michael works as a packager in the Freight and Delivery Department.
Michael is an efficient worker and attempts not to waste packing materials, and is overall costeffective
in
completing
his
allocated
tasks.
However,
despite
of
Michael
diligence
and
all
those
of

his
colleague’s
proficiency
and
competency,
the
company’s
share
price
had
declined
from
$22.00

to
$15.00
in
the
past
10
months.

Computer Products Limited profitability was increasing at a growth rate of 3% per year. Employees
could not understand why the company’s share price declined, whilst profits rose.
Lotus indicated to Michael that she has seen documents describing the firm’s profit-sharing plans
under which all managers were partially compensated on the basis of the company profitability.
Lotus suggested that it was the profits that were important to management, as it has direct impact
on their salaries. Michael suggested that as shareholders own the company, management is
responsible in achieving optimum share prices for the shareholders.
Computer Products Limited has paid cash dividends to the shareholders on an irregular basis. The
cash dividend can be regarded as a form of profit distribution. Shareholders have complained on
the lack of dividends distributed plus the fall of the share price.
Additionally, the company is being sued by the State Environmental Office for dumping pollutants
in the nearby river. The unofficial policy is to limit expenditure on pollution controls, as having a
comprehensive pollution policy, costs will increase, and profits will be lower and will have an
impact on management earnings.

Required:
1. Why is corporate finance important to all managers?
2. What should the management of Computer Products Limited pursue as its overriding
objective? Why?
3. Do firms have any responsibilities to society?
4. Is share price maximization beneficial or detrimental for society?
5. Evaluate the firm’s approach to pollution control. Is the firm behaving ethically?
6. Why might incurring the expense to control pollution be in the best interests of the firm’s
owners in spite of the negative impact on profits?
7. Does the company have an agency problem? Explain.
8. On the basis of the information provided, what specific recommendations would you offer
Computer Products Limited.

Assessment Criteria

The assessment is criterion based. The criteria include an assessment of your knowledge
and understanding of content, research skills utilised, communication and your ability to
evaluate the relevance of your findings.

MARKING CRITERIA ASSESSMENT SHEET
TOTAL=60 MARKS CONVERTED TO 20%

QUESTIONS MAXIMUM
MARKS
1         5
2         5
3         5
4         5
5         5
6       10
7         5
8       10
REFERENCES,
TABLES,
DIAGRAMS
10
TOTAL       60

STUDENT
MARKS &
COMMENTS
Grade:      HD    D    C    P    F

COMMENTS___________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
____________________________________________________________________
LECTURER/TUTOR_______________________________________DATE__/___/2012

SOLUTION

Question No:-1

Why is corporate finance important to all managers?

Answer:

It is important for any business to keep generating profits to remain sustainable in long term and also grow over time. For this purpose it is important that the resources of the company are used properly and efficiently and every resource has some financial. So to use the resource properly, it becomes important for managers to understand how value creation takes place in the organization and in this regard corporate finance helps a lot to managers.

The corporate finance provides enough knowledge and skills to the managers that they can easily and efficiently can understand the nitty gritty and importance of the resources being used in the organization during various processes. So the knowledge of the basics of the corporate finance to the managers help them to understand the right value of the resources so take right decisions. This is the reason why corporate finance is of huge importance to all the managers.

Question No:-2

What should the management of Computer Products Limited pursue as its overriding objective? Why?

Answer:

The management of the Computer Products Limited is in sticking situation as the workers like Michael are working effectively and efficiently and the costs that are utilized are optimal one. From the specifics mentioned in the case, it is clear that all the employees at Computer Products Limited are efficient and competent for their respective task and working efficiently. So it seems difficult to reduce costs unless there are some technical changes in the process of the production and packaging that the company follows.

Like all the other firms, the main aim of the company is to increase profitability while adding value to the business. This can be done by making processes more efficient and by deploying better technologies so that the costs are lower than the previous levels. So the objective of the company should to make the overall process more efficient as a whole to cut costs and increase overall efficiency of the production process. As now it is not possible for the company to better the margins and add value by making one or two processes in the whole process. Instead it is required to make and fine tune the overall system. This will increase the profits and add value to business that will finally help in future operations to the company.

Question No:-3

Do firms have responsibility to society?

Answer:

Yes the firms have responsibility to society. All the firms operate in the society and for the society so it their ethical responsibility to be responsible towards the society. Whatever a firm does it does for the society whether value creation or profit generation. All the activities of the firms by one way or other affect the society directly or indirectly. If firm has some activities that can harm the society would lead to harm the interests of the firm too sometimes directly and sometimes indirectly. For example if food processing unit has some operations that is contaminating the ground water of the locality. This will lead to health problems for the locales. And as result of health issues, the people residing on the  area will have spend more on medicines and other health related expenses and the proportion of the expenditure on other accounts will drop. As a result of the drop in the expenditure on all the account will lead to drop in the consumption of the products produced by the food processing unit of the area too and this situation will lead to lower demands for the products. So the profits of the firm will fall. That is why it is said that firms have responsibility toward the society while meeting their respective objectives and goals (Donaldson and Dunfee, 1994).

Question No:-4

Is share price maximization beneficial or detrimental for society?

Answer:

The share price maximization by the firms can be beneficial as well as detrimental for the society depending on the situation and strategy adopted by the firms. If the firms devised and executed some strategies and technologies and methods that would increase the profits and share prices but would not take care of the costs to the society, the strategy would be harmful for the society. So in this regard, the share price maximization practices can be said to be detrimental for the society as the process and methods and technologies would harm the society and increase risks to the people that may cause threats to their existences.

But at the same time it is beneficial for the society too to maximize the share prices. If a firm devises and executes an strategy of value creation and profit maximization and share price maximization in such a way that the changes in the methods or process or technologies will not have any negative impact on the society and the people living in the area, then the increase in profits and share prices and value created will benefit the society in one ways or many ways as it will help the people living in the society to enjoy better products and more value. So the overall process will increase the overall value to the society. So the process of share price maximization is beneficial to society too (Donaldson and Dunfee, 1994).

Question No:-5

Evaluate the firm’s approach to pollution control. Is firm behaving ethically?

Answer:

The firm has very irresponsible approach toward the pollution control and it is not behaving ethically. The firm has practice of dumping all the pollutants in the nearby river. This practice of the company is polluting the river. This method of dumping the pollutants in the river without treating the waste material will increase the level of dangerous pollutants in the water that will in result contaminate the ground water of the area and devastate the river ecosystem. So the availability of fresh drinking water in area will drop and people living in the locality may be subjected to many health problems of contaminated water and adverse river ecosystem. So the firm’s practices are harmful for the whole society as it is increasing the liability to the society and creating new problems both at the same time. And this practice of increasing problems and liability on the society as well as destroying the river ecosystem and causing irreversible damage to environment is unethical for any firm or person because of its own actions or activities.

Question No:-6

Why might incurring the expense to control pollution be in the best interests of the firm’s owners in spite of negative impact on profits?

Answer:

It is true that incurring expenses on controlling the pollution will have negative impact on the profitability of the firm; so on the interests of the owners for sure but it is better to spend on pollution control and earn lower profits than without spending any penny on pollution control as this in medium to long term will harm the interests of the firm only.

The firm will have to face problems from two angles; one from the regulatory or government sides and other is from the business side. The government rules regarding the environment and pollution are becoming very tough and stringent. So it is now difficult of the firms to keeping damaging the environment and ecosystem in current environment. This is evident from the legal notice and action taken by the State Environment Office as the State Environment Office has sued the firm for dumping the pollutants in the nearby river. This will result into huge financial burden for the company as it has to defend itself in court and has to pay fine for being insensitive towards the environment and not following the government rules. This will create troubles for the company and will take huge time of management. This is a type financial loss for the company as it will lose money in form of fines, legal costs and opportunity costs.

From the business point of view, if the company keep dumping the pollutants in the nearby river, the practice will result into increased pollution in the area. This will make people less healthy and the quality of material resource too will fall because of increasing pollution in the area. So company will have to spend more on making the resources usable for the operations and this will increase costs to the company resulting in lower profits in future. While on the other hand, people will start consuming fewer products produced by the company because of increasing medical bills to adjust their month budget. So the demand for the product may end up falling; so is the profit for the company. Also because of falling demands, the cost per product will rise. This too is uncomfortable situation for the company’s sustainability in long term.

So from both the sides, company is going make financial losses by having to pay huge fines, legal cost, opportunity costs and lower profits because of lower demands for the products and increasing costs per product (Goodpaster, 1991).

Question No:-7

Does the company have any agency problem? Explain.

Answer:

The company seems to have some agency problems as it does not have any comprehensive pollution control mechanism or policy. And this is the area that can cause some agency problems as suggested by the case presented. The regulatory authority may impose some actions or fines that may result into increasing financial burdens of the firm. So the practice of company of not having any pollution control mechanism will result into creating agency problems for the company because of the changing rules and government and regulatory agencies being strict towards environment protection. So the company has some agency problems (Easterbrook, 19984).

Question No:-8

On the basis of the information provided, what specific recommendations would you offer Computer Products Limited?

Answer:

From the case presented it clear that company will have to face problems if it avoids having a robust pollution policy and mechanism. It is advised that company should stop dumping the pollutants in river. Instead it should invest in proper waste disposal system to ensure that it is complying with the rules and laws of the land. So the first step it must take is to put a proper and efficient pollution disposal system to avoid any legal and regulatory problems. The second thing it needs to is to overview the overall system to better it efficiency as at the present level it is not possible to better efficiency by improving in one or two department. Company may also consider upgrading its technologies so that it is able to produce better quality products at lower costs.

References

• Easterbrook, F.H 1984, Two Agency-Cost Explanations of Dividends, The American Economic Review Vol. 74, No. 4 (Sep., 1984), pp. 650-659
• Goodpaster, K.E, 1991, Business Ethics and Stakeholder Analysis Business Ethics Quarterly
  Vol. 1, No. 1 (Jan., 1991), pp. 53-73
• Donaldson T. and Dunfee T.W. 1994, Toward a Unified Conception of Business Ethics: Integrative Social Contracts Theory The Academy of Management Review Vol. 19, No. 2 (Apr., 1994), pp. 252-284

JF43

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