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College of Business and Economics
Principles of Finance FINA 201
Assignment Fall 2014
Individual Project (5%)
Deadline 12.00 midnight on Saturday 29/11/ 2014
NAME: _________________________________________ ID #: __________________
THE AIM of this assignment is as follows:
· Understand the basic ethics behindagency problemin business.
· Use what you have learnt so far on the course to this project
WHAT YOU HAVE TO DO:
You should submit a 1000 words case study report on Principle agent problem in business companies.
You must follow Qatar Universitys formatting guidelines and include references. The report will be graded on the detailed criteria outlined on page three of this document. The recommended layout of your report is given in the following bullet points.
· Cover page (your names, date & number of words)
· Executive summary (A high level summary of the project)
· Table of contents
· Introduction (background of chosen banks, firm or institution)
· What the chosen company is doing regarding your chosen topic.
· Analysis and evaluation.
· Recommendations
· Conclusion (summarize all the above)
· References
· Your project should be no more than 1000 words (executive summary and any references and appendices do not count towards the word limit).
Choose ONE of the following three cases to write about it:
The Fall of Enron
The collapse of energy giant Enron in 2001 showed how catastrophic the agency problem can be. The company’s officers and board of directors, including Chairman Kenneth Lay, CEO Jeffrey Skilling and CFO Andy Fastow, were selling their Enron stock at higher prices due to false accounting reports that made the stock seem more valuable than it truly was. After the scandal was uncovered, thousands of stockholders lost millions of dollars as Enron share values plummeted.
Goldman Sachs and the Real Estate Bubble
Another agency problem occurs when financial analysts invest against the best interests of their clients. Investment giant Goldman Sachs and other stock brokerage houses developed mortgage-backed securities, known as collateralized debt obligations, then sold them “short,” betting that the mortgages would undergo foreclosures. When the housing bubble hit in 2008, the values of the CDO’s dropped and the short-sellers made millions of dollars. Meanwhile, millions of investors and homeowners lost nearly everything in the collapse.
Executive Compensation and WorldCom
When an executive uses company assets to underwrite personal loans, the agency problem occurs as the company takes on debts to provide its executives with higher incomes. In 2001, WorldCom CEO Bernard Ebbers took out over $400 million in loans from the company at the favorable interest rate of 2.15 percent. WorldCom did not report the amount on its executive compensation tables in its annual report. Details of the loans did not come out until the company’s accounting scandal hit the news late that year.
Reading list:
.nytimes.com/2011/11/08/opinion/end-bonuses-for-bankers.html?_r=0″>http://www.nytimes.com/2011/11/08/opinion/end-bonuses-for-bankers.html?_r=0
.blogactiv.eu/2013/06/30/124/”>http://euractivgreece.blogactiv.eu/2013/06/30/124/
Grading Criteria:
Performance Area
1: Does Not Meet Expectations
2: Needs Improvement
3: Meets Expectations
4: Exceeds Expectations
Identifies Dilemma
Has a vague idea of what the dilemma is and is uncertain what must be decided
Identifies in general the dilemma, including pertinent facts, and ascertains what must be decided
Describes the dilemma in detail having gathered pertinent facts. Ascertains exactly what must be decided
Describes perfectly the dilemma in detail having gathered pertinent facts. Ascertains exactly what must be decided by considering the consequences
Considers Stakeholders
Is unsure as to who should be involved in the decision-making process
Determines who should be involved in the decision making process and accurately identifies all the stakeholders
Determines who should be involved in the decision making process and thoroughly reflects on the viewpoints of the stakeholders
Determines with precision who should be involved in the decision making process and thoroughly analyzes the viewpoints of the stakeholders
Analyzes Alternatives and Consequences
Begins to appraise the relevant facts and assumptions and was unable to identify alternatives.
Clarifies at least two alternatives and assessed broadly their associated consequences in detail.
Clarifies a number of alternatives and evaluates each according to their relative importance to all stakeholders
Prescribe a large number of alternatives and evaluates consciously each according to their relative importance to all stakeholders
Chooses an Action
Has difficulty identifying and appropriate course of action from among alternatives
Formulates clearly a general implementation plan that describes the execution of the decision
Formulates an implementation plan that describes the execution of the decision with a clear understanding of the potential effects of the chosen action
Formulates and recommend a rational and practical implementation plan that thoroughly describes of the potential effects of the chosen action