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1) Corporate financial plans are often used as a basis for judging subsequent performance. What can be learned from such comparisons? What problems might arise and how might you cope with such problems? The ability to meet or exceed the targets embodied in a financial plan is obviously a reassuring indicator of management talent and motivation. Moreover, the financial plan focuses attention on the specific targets that top management deems most important. There are, however, several dangers. a.Financial plans are usually accounting-based, and thus are subject to the Biases inherent in book profitability measures. b. Managers may sacrifice the firm’s best long-term interests in order to meet the plan’s short- or medium-run targets. c. Manager A may make all the right decisions, but fail to meet the plan because of events beyond his control. Manager B may make the wrong decisions, but be rescued by good luck. In other words, it may be difficult to separate performance and ability from results. Corporations use numerous arrangements in an attempt to ensure that managers’ actions are consistent with stockholders’ objectives. Agency costs can be mitigated by ‘carrots,’ linking the manager’s compensation to the success of the firm, or by ‘sticks,’ creating an environment in which poorly performing managers can be removed. 2) Managers sometimes state a target growth rate for sales or earnings per share. Do you think that either makes sense as a corporate goal? If not, why do you think that manager focus on them? Neither the growth rate of earnings nor the growth rate of sales translates generally into value maximizing policies for the firm; in this sense a focus on these variables is not an appropriate corporate goal. Nevertheless, targets for these growth rates might be convenient ways to signal the belief that, in a particular situation, increasing a variable like sales could be value enhancing. Moreover, focusing on a particular variable like sales growth might provide a guideline as to what aspect of corporate performance requires the most attention. These growth rates might be viewed as easily communicated proxies for factors that are more fundamental concerns of management.