Assessing the Goal of Sports Products, Inc.

Essay by arualUniversity, Bachelor'sA+, January 2011

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Assessing the Goal of Sports Products, Inc.

FIN/419: Finance for Decision Makers


Assessing the Goal of Sports Products, Inc.

Many people believe that the primary objective of a firm is to maximize profits. Sports Products, Inc. is a firm who has followed this practice during its 20 year history. The management of Sports Products, Inc. has concentrated on maximizing profits while ignoring other critical factors. Management's decision to maximize profits has created issues with its overriding goal, agency problem, approach to pollution control, and corporate governance. In order for Sports Products, Inc. to resolve the issues, changes need to be made in the way it operates.

Overriding Goal

The primary goal of a firm should be to achieve the objectives of its owners, also known as shareholders; therefore, management of Sports Products, Inc.

should pursue maximizing shareholder wealth as its overriding goal. The current objective of Sports Products, Inc. has been to maximize profits, but "profits do not necessarily result in cash flows available to the stockholders" (Gitman, 2006, p. 15). Owners only receive cash flow when receiving dividends or selling their shares for a higher price than when first purchased; Sports Products, Inc. has failed to pay dividends in its 20 year history. Although profits may increase earnings per share, higher earnings per share do not increase stock prices unless accompanied by increased future cash flows. A decrease in future cash flow may result in decreased share price. The price of Sports Products, Inc.'s stock has declined nearly $2 per share over the past nine months. Because share price has decreased and "share price represents the owners' wealth in the firm" (Gitman, 2006, p. 15), Sports Products, Inc. is failing to achieve...