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This is because there is the need to cushion the company from the decline in profitability in the year 2009 as compared to the year 2008. Since such a decline may not have been anticipated, there is a need to ensure the managers bonuses do not affect negatively the affairs that need financial base from the company’s revenue.
Some issues would arise. For instance, there may be disappointment among the executive managers due to a likely reduction in their bonuses. Financial cuts may be necessary on some key budget matters. This may hurt the company’s financial plans in the short run. Hiring of new managers may be impeded due to the unexpected decline in profits. Alternatively, the non-content managers may walk out creating room for new recruitments.
Q5. Shareholder Wealth-Maximization Model of the Firm
a) Entry of foreign investors into the market would bring about increased competition. The firm may lose their clients to their new competitors. This is because the new investors may come with new ideas and better products for the consumers.
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b) Enactment of strict environment requirements would increase the firm’s expenditure. This would reduce its financial muscles since a lot of money would be channeled towards waste management.
c) When nonunion workers unionize, the firm’s management loses its control of the labor force and must be ready to meet its demands or risk paralysis of its operations through industrial action by the entire workforce.
d) Increase in inflation rates means the firm’s production cost goes up. This comes as a result of the corresponding rise in prices of necessary materials.
e) With a major technological breakthrough and subsequent reduction in production cost promises increased profitability of the firm. This is because there would be reduced expenses and constant returns for the firm.