Chapter One: Introducing the firm and its goals

Week 2: Chapter 1 - Introducing the Firm and its goals

Questions
1.4 Would a manager confronted with given circumstances necessarily make the
same decision when pursuing either profit- or wealth-maximising
objectives? Explain with an example.

1.7 Internal auditors normally report to the chief financial officer.

(a) What do you think are the roles of the internal auditor?
(b) Is there likely to be an adversarial or collegial relationship between the
internal auditor and the chief financial officer?
(c) Which type of relationship is likely to be most beneficial to the firm?

1.8 Why would a firm not want to keep more working capital than necessary
in a cheque account?

1.10 What are some of the reasons that might motivate a corporate chief executive
officer (CEO) not to try to maximise his shareholders’ wealth in relation to
the firm’s activities?

1.13 Genuine Used Cars is a second-hand car dealer with a landscaped yard on a
busy highway serving Sydney. The plants used to ‘decorate’ the yard are all
high water users. Drought is setting in and the local council has asked
businesses to conserve as much water as possible. Town water is still
available, bore water may be accessed in fairly shallow bores and the
council is encouraging businesses to install underground tanks to conserve
rain water. Which source of water should be used to gain the most brownie-
points ethically? Should the firm change the plants for more efficient water
users?

1.15 An investment firm supports the coal-mining industry with infrastructure

funds and also invests in tree plantations for paper-pulp production. Are
the environmental ‘goods’ attached to the plantations cancelled out by the
environmental ‘bads’ of the coal mining?

Financial problems
1.3 Toowoomba Computer Works (TCW) has employed a programmer to write
business programs for their clients. She writes a program which will be ideal
to use to teach first-year accounting students the rudiments of electronic
financial record-keeping. It sells for $200 per copy. TCW decides to give 100
copies free to the local university to be distributed to students in whatever
way the course lecturer decides. The firm also gives the university a free site
licence.
 Chapter One: Introducing the firm and its goals

(a) Would this action tend to work against TCW’s avowed objective of
wealth maximisation?
(b) Is there an ethical problem here for any of the parties?

1.4 Dan Levy is in partnership with three others in their business, Outdoor
Camping World. (Outdoor World had been Dan’s business and Camping
World had been run by the other three until they merged the businesses last
year. They merged the names too, so they might keep all their old customers,
even though it doesn’t make much sense.) Dan argues that the firm should
maximise gross profit margins [(selling price – buying price)/ selling price]
on each item of stock.
(a) Do you think this is a valid financial objective?
(b) Is this objective consistent with maximisation of partners’ wealth?
(c) What problems do you see in operationalising this objective?

1.9 On what bases could you argue the collapse of HIH was an example of the
principal-agent problem?

1.11 The incorporation of ethics into business practices has been characterised as
‘doing well by doing good’.
(a) Why would firms want to ‘do good’?
(b) Give some examples of ‘doing good’ by employees, the general
community and the natural environment.

1.13 Tinsel Tin Company, an Australian company, mines tin using cheap,
resource-wasteful techniques in a tropical country. The effects of the mining
include pollution of freshwater streams from almost their sources to the sea.
The local people used to fish, hunt near, get drinking water from and swim
in these streams, but now none of these things are possible. Local people now
buy canned meat for protein. It is relatively cheap and tends to be very poor
quality with a very high fat content. As a result, the local people are much
fatter than they used to be and their health is poorer. Tinsel has supplied a
fully equipped medical clinic but expects the local people to supply the staff.
Discuss each of the following questions.
(a) Has Tinsel contravened, in your view, its ethical responsibilities?
(b) Is it possible to trade off an ethical ‘bad’ with an ethical ‘good’?
(c) Has Tinsel done enough to compensate for the change they have
brought about in the local people’s lives?

THE END