There is a tendency for CEOs of larger companies to earn more money than CEOs of smaller companies. Suppose a CEO decides to acq
uire another company, thus increasing the size of the CEO's firm. Suppose also that the price of the stock of the acquiring firm falls when it learns of the upcoming acquisition. This appears to be an example of:______ a. the principal-agent problem
b. a CEO pursuing profit maximization rather than wealth maximization
c. a CEO behaving unethically
d. the general principal that acquisitions are generally not good Investments
Though it might be seen initially that the CEO is not trying to increase the value of the shareholders wealth because the share price of the acquiring firm is falling down. This is half picture of the story. It is possible that this acquisition will bring value to the shareholders of the acquiring firm because the acquiring firm will add value to the firm acquired and the sales will grow drastically. As the story we are told is till interval so initially it is more relateable to principal agent problem. Principal agent problem is that agent (CEO) is not acting in the best interest (Wealth maximisation) of the principal (shareholders).
The CEO is not behaving unethically because there are doubts, CEO is pursuing profit maximization is totally wrong because we are not seeing short term profits and it is evident from the past that many parent companies added values to its subsiduaries.
High entry costs prevent new producers from entering the market. ... Producers actively segment the market to avoid competition. High entry costs prevent new producers from entering the market.
Fixed cost remains constant for a given period and does other change with the eh level of production. However, the per unit fixed cost decreases when the Level of production increases and vice versa.
Also, fixed cost is difficult to.control and manage relatively to the variable.costs.
The acid test ratio of a company measure how well a company would be able to pay off its current liabilities using its most liquid current assets (current assets less inventory).
= (Cash + Accounts Receivable) / Current liabilities
True. This demonstrates that buyer has confidence on buying products that are branded. She has trust that the product can satisfy her because the brand already earned a reputation in its field. It also shows that she passed scrutiny on the bought product.