4. What conflicts did Barings have in turning a blind eye to Leesons trading?
Suggested Answer: First, Barings believed that Leesons operations were based
on simple arbitrage so that risk exposure was minimal. They might have felt it was
safe not to expen
LIST OF CASES
Case 1UBS and Morgan Stanley: An Elaborate Insider Trading Scheme
Case 2Emulex and Mark Jakob: Market Manipulation with False Information
Case 3Fidelity Traders and Gifts from Jefferies: Soliciting Brokerage from Traders
Below are some measures for CEO compensation. Given the smaller size of MEH,
total compensation seems a bit high. In addition, the CEO has less ownership
interest in the company.
flavor workers lung disease. Although workers have contracted the rare lung
disease since 1992, OSHA did not issue recommendations for worker safety until late
Chairman of the Board and CEO: These positions should be separated
so that CEO doesnt have too much power. Boards should meet regularly
Independence: Board should consist of a majority of independent
Board Committees: Standard comm
Answer: Anti-takeover amendments impact the chance for shareholders to earn a
takeover premium on their shares and can cause the incumbent management
team to become entrenched. An analyst may recommend a sell recommendation
for a firm where it appears tha
the year. You might want to discuss with students what type of incentive this
creates for the managers with a focus on incentives to manipulate earnings (this
would be a nice way to tie back concepts from Chapter 6), delaying capital
investments, and make
Answers to Review Questions
1. Describe the function of the board of directors in publicly held corporations.
Answer: The board is hired to monitor the top executives of the firm by being in
charge of the hiring/firing process and setting their compensati
Cash-Flow Method of Measuring Accruals:
Total accruals =
Earnings before extraordinary items and discontinued operations
Operating cash flow +
Depreciation and amortization
The cash-flow method is probably more popular than the balance sheet method,
for ethical and diligent security analysts to be aware of an issuers corporate
governance practices before recommending an investment.
An overriding consideration for analysts is incentives. Students should be
reminded that the firm is not a black box, bu
12. List and explain at least three measures in the Beneish (1999) model that can indicate
possible earnings manipulation.
Answer: Refer to Table 6.1 in the text. Any of these three measures and the
explanation provided would suffice to answer this questi
Quality of Earnings
The important issue to emphasize to students is that financial reports provide
information to security analysts. Security analysts fundamentally use reported
earnings to forecast future economic earnings to shareholders and stock price
Earnings Smoothing: Is It Ethical?
Some consider earnings smoothing ethical because it reduces stock price volatility. It
is considered unethical, however, since it masks true earnings performance and its
volatility from shareholders.
Conclusion: Cash ver
Whole Foods Market, Inc.
TA/ A t-1
Change Rev/ A t-1
PP&E/ A t-1
Net Income/ At-1
Source: WRDS; Compustat North America
You can also go through the Beneish Model (1999). For
governance practices play in your investment decision: buy, sell, or hold. Support your
recommendations in a two or three page written report.
Guidance: The discussion of both Countrywide Financial Corp. in the text and
Barnes & Noble, Inc. in the lecture
Introduction: Directing Financial Capital to Benefit Society
SRI is one of the most difficult areas of investing for three reasons:
1. It is more difficult to quanti
Additionally, you can tie back some of the corporate governance issues discussed
in Chapter 7. Mercks Corporate Governance Quotient (CGQ developed by ISS
and reported by Yahoo!) improved after the Vioxx scandal.
This provides an opportunity to remind stud
Suggested Answer: This case squarely makes Johnson & Johnson a socially
responsible company. But an investor would need to make sure that this action is
not isolated. For example, while being a good corporate citizen with the Tylenol
poisoning they could
Case 27UnitedHealth: Backdating Stock Options
1. Who is hurt when firms backdate stock options? Because McGuire increased the stock
price during his tenure, did he deserve to receive the in-the-money options created by the
Suggested Answer: Sh
3. Could an argument be made that Hunter was employing an ethical trading strategy no
matter who it was meant to benefit?
Suggested Answer: It could be argued that Hunter was simply being clever in
taking advantage of the institutional features of the mar
stabilized profits might hurt the firms ability to have access to capital. It may have
been difficult to consider accepting that the firms growth had stalled and shift
gears into thinking about sustaining or internally generating growth rather than
develop a method for implementing the criteria as either a positive or negative screen.
Third, select a firm and evaluate whether its business practices are socially responsible.
This last project requires you to explore your own ethical values. The resul
would easily find out that they had been double crossed. Even if analysts werent
concerned about the payments made by Morgan Stanley, they might have been
intimidated by Morgan Stanley executives if they were concerned that failing to
cooperate might lead
role that those who received the bonuses had in designing the plan. The board
and top executives are more likely to have responsibility for designing the plan.
Students might argue that it would be fairer to take away the bonuses of top
executives with a
3. Was there another alternative set of actions that Hintz could have taken with respect to
selling his securities in 2004?
Suggested Answer: Yes. He could have used his Lehman holdings as collateral
for a loan to exercise his expiring Morgan Stanley opti
Case 13Salomon Brothers and Treasuries: Cornering the Market
1. Could Salomons executives have done anything to prevent the traders actions?
Suggested Answer: As in most cases, additional monitoring of T-bill transactions
by an independent department (i.e
Coke or Pepsi?
The Coca-Cola Company (KO)
Pepsico, Inc. (PEP) Adj Close
Answer: Social responsibility can be part of a marketi