Posted: April 24th, 2025

Discussion

Answer the following questions and make two peer responses per question: 

1.

What factors improve the effectiveness of a board of directors? 

2. Describe how a typical stock option plan works.  

What are some of the problems with a typical stock option plan?

4. Discuss any  recommendations that you have to improve this course.

Your initial post for each question should be roughly 300 to 500 words in length, and your responses to peers should be roughly 100 to 200 words each. Cite sources you reference as an in-text citation and under the post include a “

Reference

s” section in APA format.

Post by classmate 1

1. What Factors Improve the Effectiveness of a Board of Directors?

An effective board of directors is essential for a company’s long-term success, aligning management decisions with shareholders’ interests. Key factors include board independence, where a majority of independent directors ensures objectivity and minimizes conflicts of interest (Brigham & Ehrhardt, 2020). Diversity in gender, ethnicity, and experience enhances decision-making by bringing varied perspectives to address issues like corporate responsibility and global challenges. Clear roles and responsibilities between the board and management ensure effective governance and oversight. Committees like audit and governance further distribute responsibilities.

Regular self-evaluations help identify areas for improvement, ensuring directors contribute effectively. Additionally, informed decision-making relies on the board staying updated on the company’s financial health and business environment, aided by management and independent advisors. Finally, active engagement and accountability, with directors attending meetings and ensuring transparent reporting, enhances the board’s credibility and effectiveness. These factors enable boards to better guide companies and foster long-term success.

2. Describe How a Typical Stock Option Plan Works and Problems with a Typical Stock Option Plan

A stock option plan allows employees to buy company stock at a fixed “exercise” price for a specified period, often several years. This plan aligns employee interests with shareholders and incentivizes performance (Jensen & Meckling, 1976).

Stock options typically have a vesting period, requiring employees to stay with the company for a set time (e.g., three to five years) before exercising the options. Expiration dates generally require options to be exercised within 10 years, after which they become void. Once the stock price exceeds the exercise price, employees can sell for a profit, such as buying at $50 and selling at $70 for a $20 gain.

Problems with Stock Option Plans:

Stock options can dilute existing shareholders’ equity, as issuing new shares increases the number of outstanding shares, potentially reducing their value. They can also promote a short-term focus, pushing executives to prioritize quick stock price gains over long-term company health. Accounting complexities arise because options must be expensed, affecting financial statements. Additionally, there is a risk of manipulation, where executives may inflate stock prices for personal gain, disregarding long-term stability. While stock options align employee and shareholder interests, they must be carefully structured to mitigate these risks and potential abuses.

3. Explain an Optimal Dividend Policy for a Mature Company That Has Decided to Pay a Dividend

An optimal dividend policy for a mature company balances shareholder expectations with financial stability and growth potential. Mature companies that have fewer high-growth opportunities, often return profits to shareholders via dividends.

Important Facts:

• Sustainability: Dividends should be consistently paid, even during downturns, to avoid signaling instability and eroding confidence.
• Growth and Flexibility: A progressive policy, gradually increasing dividends as earnings grow, rewards shareholders while allowing reinvestment when needed.
• Capital Structure: Dividends reduce retained earnings, which could otherwise fund investments or debt repayment, so the policy must balance cash outflows without hindering future growth or increasing leverage.

Effect on Capital Structure:

Paying dividends reduces the company’s internal funds, which may lead the firm to rely more on external financing for future projects. While moderate use of debt can benefit companies by providing tax shields, excessive debt can increase financial risk. Therefore, mature companies often strike a balance by maintaining a dividend policy that keeps their debt-to-equity ratio at a healthy level, ensuring both financial flexibility and shareholder satisfaction.

4. Discuss any  recommendations that you have to improve this course.

I would encourage your students in the future to either buy a paperback version of the text book, or a digital lifetime copy of the textbook.  I can see myself in the next 5-10 years coming back to re-read sections of this book.

References

• Brigham, E. F., & Ehrhardt, M. C. (2020). Financial Management: Theory and Practice. Cengage Learning.
• Jensen, M. C., & Meckling, W. H. (1976). Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3(4), 305-360.

Post by classmate 2

 
What factors improve the effectiveness of a board of directors? 

The effectiveness of a board of directors can be enhanced through several structural and strategic approaches. For instance, implementing proxy voting allows shareholders to participate in governance decisions even if they cannot attend meetings, fostering broader engagement and representation. Additionally, adopting staggered terms and classified boards contributes to stability by ensuring that not all directors are up for re-election at the same time, thereby retaining valuable organizational knowledge.

Most corporations establish charters that outline the organization’s mission, objectives, and the roles and responsibilities of their members, guiding corporate governance. The presence of inside directors, such as CEOs or CFOs, provides valuable insights into the organization’s operations; however, maintaining a balance with outside directors is crucial to ensure independent oversight and avoid potential conflicts of interest. Outside directors, often well-versed in industry, finance, or other relevant fields, enhance the board’s effectiveness by bringing a wealth of external perspectives. Lastly, board diversity is essential for effective governance. A diverse board structure enriches discussions and decision-making by incorporating varied perspectives and experiences. This diversity ultimately leads to more innovative solutions that better reflect the needs of stakeholders and, importantly, their customers, representing the general population beyond race, ethnicity, or personal beliefs.

Describe how a typical stock option plan works. 

A typical stock option plan allows employees to purchase company stock at a fixed price, known as the strike price or exercise price, over a specified period. When employees are granted stock options, they receive the right to buy a certain number of shares, but they must wait for a vesting period, which can last between 1 to 5 years, before they can exercise their options. Annual vesting helps encourage long-term commitment by allowing employees to vest a portion of their stock options each year, such as one-third annually. Restricted Stock Units (RSUs) represent a form of compensation that grants employees shares after specific terms are met, aligning their interests with the company’s success, though they typically do not provide dividends or voting rights until vested. After exercising their options, employees may choose to hold the shares for further appreciation or sell them on the open market. Tax implications can vary based on the type of options and the timing of exercise or sale; for instance, RSUs are taxed differently than restricted stock awards. Additionally, stock options typically have an expiration date, often around 10 years, after which unexercised options become worthless. Employees may also utilize cliff vesting, which allows them to exercise their options all at once after a set period, such as three years, provided the stock price exceeds expectations.

What are some of the problems with a typical stock option plan?

Some problems with a typical stock option plan stem from the imbalance between what is proposed and the reality employees face. Many employees do not fully understand how the stock market functions and may focus solely on potential annual price appreciation, leading them to pursue stock options without recognizing the inherent volatility. This volatility is influenced by how companies invest their profits and allocate assets, which can result in stock options not aligning with shareholder interests. Additionally, the time frame for exercising options can vary depending on the organization’s true values and structure. If executives overhype their corporation to boost short-term profitability, it can negatively affect both employees and the broader business landscape.

Explain an optimal dividend policy for a mature company that has decided to pay a dividend.  Also, how does this affect a firm’s capital structure?

An optimal dividend policy for an established company that has decided to pay dividends typically starts with quarterly payments, which can be increased annually if the company meets its expected growth targets. Key dates play a crucial role in this process: the ex-dividend date marks the cutoff for shareholders to qualify for the upcoming dividend, meaning investors must purchase shares before this date to receive the dividend. The holder of record date follows, identifying the shareholders eligible to receive the dividend payment. Finally, the payment date is when the actual dividend is distributed to shareholders. By clearly communicating these dates and maintaining a consistent schedule, the company can enhance investor confidence and ensure a stable income stream, while also demonstrating its commitment to rewarding shareholders as it continues to grow.

The decision to implement a dividend policy can significantly affect a firm’s capital structure in several ways. Paying dividends reduces the retained earnings account, which decreases the equity available for reinvestment and may lead to increased reliance on debt financing, thereby altering the firm’s debt-to-equity ratio. Reducing cash dividends is generally avoided, as it can send a negative message to the market and signal financial distress. A consistent dividend policy positively influences investor perceptions; regular dividends are viewed as a sign of financial stability, impacting stock prices and the firm’s ability to raise equity capital. By utilizing the residual model, a company can determine an optimal level of cash distribution, balancing dividends and share repurchases. This approach often results in a lower dividend payout ratio, allowing dividends to remain stable and potentially increase over time due to a reduction in the number of shares outstanding. Additionally, limited liquidity can restrict a firm’s ability to pay dividends, potentially forcing it to borrow more to meet these obligations. Once dividends are established, management should avoid cuts to prevent declines in stock prices. Therefore, firms must carefully consider their future investments and internal sources of funds to understand how these decisions will impact their capital structure year after year.

What you think Discuss any recommendations that you have to improve this course:

Every course can benefit from continuous improvements to better guide and inform students about expectations. FIN689 Financial Management is my third course at National University, and its structure is notably different from my previous two courses. This isn’t inherently good or bad, as breaking from routine can foster fresh perspectives. I appreciated how this course encouraged deep engagement through a single textbook, which greatly aided my understanding. However, the assignments often focused primarily on definitions rather than encouraging reflection on broader societal contexts.

For effective learning, it is essential to investigate the subject while also relating it to familiar aspects of real-world applications. This need was particularly evident during our Zoom sessions, where reviewing course materials helped contextualize the content beyond merely defining financial terms. I found myself analyzing ways to interconnect the definitions to reflect a comprehensive perspective rather than just defining them. This approach guided me to fully understand what I was writing about, demonstrating that there are always pros and cons to every perspective. I recommend incorporating more assignments or discussions that connect financial concepts to current events or societal issues, allowing students to see the relevance of what they are learning in a practical context.

Reference

Ehrhardt, M. C., & Brigham, E. F. (2023). Corporate Finance: A Focused Approach (8th ed.). Cengage Learning US.

https://nu.vitalsource.com/books/9780357714713