Question 1.
You are given the diagram below. Explain what the diagram shows in relation to the module 1 topic on accounting information and capital markets.
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Answer 1.
The diagram above is based on research findings done by Beaver, Clarke and Wright (1979) and Foster, Olsen and Shevlin (1984).
It shows the magnitude of forecast error and the magnitude of share price reaction in the share market. The researchers on the basis of their findings found out that the results were consistent with the Ball and Brown (1968) study. They found that there is a relationship between forecast error in Earnings Per Share and the share price reaction. The researchers instead of grouping the firms into two groups grouped them into ten portfolios. They determined these portfolios on the basis of forecast earnings per share.
The diagram ranks all the firms based on the magnitude of forecast Earning Per Share. Portfolio 1 firms are the worst performing firms as they have the most
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The Debt holders?
Answer 3
In order to motivate the management to work in the interest of the owners and reduce their amount of opportunism there is a need to align their interests with that of the shareholders. Both the shareholders as well as the managers should benefit from their agency relationship. In other words we need to align their incentives because shareholders want maximisation of firm’s value whereas managers want to maximise their remuneration.
Therefore, to align their incentives there is a need to negotiate a bonus plan contract in which bonus will be paid to the managers in accordance to the earning performance of the firm. Higher the earnings of the firm higher will be the bonus paid to the managers and vice versa. This will be an incentive to hard work for the managers because their bonus is directly linked to the earnings of the firm and if they maximise the earnings of the firm it would mean maximisation of shareholders value as well as maximisation of managers
The emergency rescue of the Royal Bank of Scotland in 2008 has cost the UK government thus the British taxpayer a huge amount of money. Many people are upset about the high bonuses the RBS management board have received, both because of the outrageously high amount and because the performance of the bank on the long-term was not good at all. According to the agency theory managers do not always act in the interest of the shareholder, but often act in the interest of themselves. The downfall of RBS could have been prevented if managers were not paid out a bonus based on their performance of one year, but rather a combination of a bonus based on their performance of multiple years and a bonus ...
Employees protested, “that supervisors should have received a reduced bonus because they were not working as hard as they are and the company might be playing with the numbers” (Beer & Collins, 2008 p.6). A beneficial system for the new Scanlon Plan is to rearranged payout count. This will help to regain trust amongst employees and management. Equity Theory stresses integrity to all compensation arrangement and if this is effectively executed, then this will resolve the mistrust issue that employees have with their management team. The rewards should not be paid on a consistent month-to-month basis, instead, on a settled proportion plan, which gives rewards "each nth time the right behavior is demonstrated" (Bauer and Erdogan, 2013, p. 112). Traditionally, this would imply that workers are paid reward each time a specific measure of cash in permitted payroll is met. “The current permitted payroll is at 38% of sales value” (Engstrom, 2008). This requires no change. Instead, when Engstrom comes to a permitted payroll of one million dollars, then 10% of that sum should naturally disbursed to workers as rewards. This tackles numerous past issues with the Scanlon
The financial report shows that sainsbury 's equity ratio fell from 38.48% in 2016 to 35.38% in 2014, while tesco was 19.65% in 2016. The data show that Sainsbury is well-run and all aspects of operation are stable. When shareholders run the company, more resources can be used to get a better return. Earnings per share can be directly seen in the financial report, which is an important measure of equity. It can predict the future of the company 's profitability. Sainsbury 's unit profit margin for the past three years averaged 0.3% and the trend is reduced, even negative in 2015. This means that the company is losing money in 2015 and this trend is similar to tesco. Although the downward trend represents a drop in the company 's profitability, Sainsbury 's stock market is optimistic, as the 2014 and 2016 figures indicate that Sainsbury 's shares are blue-chip stocks. The ratio of shareholders ' equity to asset - liability ratio is equal to 1. These two ratios reflect the long-term financial situation. The larger the ratio of shareholders ' equity, the smaller the ratio of assets to liabilities . The smaller the financial risk, the stronger the ability
Management should share the responsibility with employees to calculate how fast bonuses are generated and earn. This may be a sensible strategy explained by the Vroom 's Expectancy theory; which suggest that people will be motivated to accomplish an objective if they feel it benefits them and also help accomplish the objective. Thus, the employees feel a significant worth of respect, and their sense of liberty increases. The modification to the Scanlon Bonus Plan directly relates to the motivation of employees and has them embrace the social system they operate in at the organization. These adjustments of the Scanlon Bonus Plan straightforwardly identifies with the motivation of employees and how they embrace the social
The form of the additional capital funding (i.e. equity vs loan) has no tangible impact on SJKII and Fosun’s voting power since Fosun and SJKII are the majority shareholders and the debtors.
The company Steel Co, which has been established for around 30 years, has been in a steady decline during the current recession and although a Divisional Director has been employed by the owner the fortunes of the company have not improved. The staff is unhappy, unproductive and unimpressed by the Human Resource system that currently exists in the company. The pay structure that currently exists within the organisation has been much debated among employees who feel it is unsatisfactory. The Business Adviser will research Performance and Reward management tools in order to help the company develop a more suitable Performance and Reward system to use. A variety of sources will be used in order to evaluate the system and tools against other organisational frameworks. The pay structure within the company will also be looked at in order to identify any possible changes that could be made.
Hansen, M., ABA Journal. Jul97, Vol. 83 Issue 7, p20. 2p. 1 Color Photograph, 1 Chart.
In contrast , the shareholder theory organisations or organisation's decision-makers only have the responsibility to their shareholders by increasing the organisation profits and should only make the decisions to increase as much as possib...
The major objective of incentive plans is to preserve a company most capable people. In order to maintain the competitive edge, companies have to award incentive plans and bonuses that are similar or greater than other companies. The retentive of the best talent is merely a one benefits with offering incentive plans, when employees receive incentive for their work production tend to increase along with the company’s profits.
Incentive reward engagement offers a win-win situation for the employees and the company. Kelleher believes that incentive is a form of recognition and builds engagement through company’s and employee’s obligations towards a common goal (2014). The company has a “Growth Incentive Scheme” for the production workers. Special monetary incentives are provided should the workers achieve the monthly output target. Through the rewards, employees feel motivated towards their work and thus, contribute towards the company’s
Reward Management (RM) has been defined as the distribution of monetary and non-monetary rewards to employees in an effort to align the interests of the employees, the organisation, and its shareholders (O’Neil, 1998). In addition O’Neil (1998) also suggests that a RM system can serve the purpose of attracting prospective job applicants, retaining valuable employees, motivating employees, ensuring legal requirements relating to direct and indirect rewards are not violated, assisting the company in achieving human resource and business objectives, and ultimately assisting the organisation in obtaining a competitive advantage.
It is important for manager to understand that what motivates the individuals. There are different kinds of motivation theories which reveal that individuals are motivated by different factors. For example there is extrinsic motivation and intrinsic motivation (Amabile, 1993). Extrinsic motivation refers to the motivation that one has for the extrinsic rewards such as pay, status, power, etc. Then there are intrinsic motivating factors such as the chance to exercise one’s skills, the opportunity to learn and personal development. Research suggests that various factors motivate employees in a different degree depending on their nature. It would therefore be important for the manager to understand that what are the motivating factors for individual employees and then provide them incentives accordingly so that they can work in a more productive fashion. Once the individuals work with greater excitement and vigour it would automatically lead to better performance.
Investors in the stock market judge earnings growth against two figures: the average industry earnings and the estimated earnings for the company. If analysts predict earnings to be above the industry average, a company’s stock price will usually rise. If companies report earnings higher than predicted, stock price will typically rise even more.
Although primary objective for managers is to maximise shareholders’ wealth, but many firms are started to focus on other stakeholders’ interests in recent years. Company can prevent transfer the damage of stakeholders’ wealth to shareholders when focus on stakeholders’ interests. In other words, “social responsibility” for the companies is to maintenance stakeholders’ relations in order to provide long-term interests to shareholders. By this way, conflict, turnover and litigation of stakeholders can be minimise. Obviously, company can achieve their primary objective by cooperation with stakeholders instead of conflict with stakeholders (Smart, Megginson, Gitman, 2002).
Management spends a huge amount of time to design incentive systems and schemes to motivate their workers and to ensure they work in their best possible manner. Motivating workers by giving them decent pay helps in winning employees heart to make the work done efficiently, significantly and effectively. The most effective way to motivate people to work productively is through individual incentive compensation (Pfeffer, 1998). An attraction of getting more is a powerful incentive to people for high performance. While most people agree that money plays a major role in motivating people, in organizations there is a widespread belief that money may also have some undesirable effects on morale.