Case2 Solution

Fundamentals of Corporate Finance + Standard & Poor's Educational Version of Market Insight

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Question #1) Overall, everyone did quite well on this question. You were penalized for not specifying details on option and bonus contracts. In addition, if your bonus was linked to measures of cash flow or income without mentioning that these are not really appropriate measures in this case, you were penalized (not a lot). The rationale here is that the CEO is primarily being hired to spur growth in patent research, which can take years to manifest into cash flows. You do not want the CEO to basically have little or no shot at a bonus in his or her first several years. Question #2) Overall, everyone did well here. Interesting work huh? Question #3) This is a tricky question. Let’s explore each of the players in this game and how the rules would affect them. Target: Target shareholders will probably accept most offers that have a premium (because they are making more money) unless they feel a better offer may be forthcoming. Note that the managers and
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