4. Difficulties a company faces in trying to create shareholder value.pptx - DIFFICULTIES A COMPANY FACES IN TRYING TO CREATE SHAREHOLDER VALUE Slide

4. Difficulties a company faces in trying to create shareholder value.pptx

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Slide Deck #4 Lloyd Levitin FBE 421 Fall 2020 Professor of Clinical Finance and Business Economics DIFFICULTIES A COMPANY FACES IN TRYING TO CREATE SHAREHOLDER VALUE
Making acquisitions to promote growth and prestige of a firm regardless of whether value is created; Justifying uneconomic acquisitions based on "strategic" rationales; Building-up of excessive overhead; Providing incentive programs with generous payouts regardless of performance; Refusing to change managers or divest or sell business units that consistently perform poorly; Making uneconomic decisions to "smooth earnings" or meet earning targets; Preventing a takeover which will create substantial shareholder value in order to protect jobs . MANAGERS TOO OFTEN DISREGARD VALUE CREATING PRINCIPLES BY: Why Managers Often Fail to Create Value 2 Spring 2020
Assuming the future will be like the past, that past margins and growth rates will persist; Overlooking the forces of competition and assuming competitors will not match cost reductions, capacity additions or product innovations; Assuming that competitors' current "irrational" pricing behavior won't last; Assuming that one or more competitors will surely exit since business is so bad and this will allow survivors to begin earning decent returns again. MANAGERS TOO OFTEN MAKE OVEROPTIMISTIC FORECASTS: Why Managers Often Fail to Create Value 3 Spring 2020
Optimal debt policy is to issue debt as long as benefits outweigh the costs, but no more than that Very difficult to compute just what optimum debt level is Management can avoid these mistakes: Using up debt capacity to sustain dividend payout

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