Army Institute of Business Administration

Financial Management
FIN 8401

Assignment
on
SYLHET PAPER MILLS

Submitted to:
Md. Ali Ashraf

Submitted by:
Sakib Mohammed Malik

17th April 2020

 Table of Content

1. Case Study…………………………………………………………….. 1

2. My Findings…………………………………………………………… 2 – 3
 Case Study

Jibonanondo Das and Nazrul Islam are employees of Sylhet Paper Mills which produces and sells
various paper-based products. Jibonanondo works as a coordinator in the Admin & Finance
Department, and Nazrul works as a section officer, and both of them own some shares of Sylhet
Paper Mills. One day, while both Nazrul and Jibonanondo were returning back home in the same
bus, Nazrul complained that he had always worked hard to reduce any expense whenever possible.
In spite of his efforts and those of his co-workers in his department, the firm’s stock price had
declined nearly $12 per share over the past 9 months. Jibonanondo indicated that he shared
Nazrul’s frustration, particularly because the firm’s profits had been rising. Neither could
understand why the firm’s stock price was falling while profits were rising.

Jibonanondo indicated that he knows the firm’s profit sharing plan under which all managers were
partially compensated on the basis of the firm’s profits. He suggested that maybe it was profit that
was important to management, because it directly affected their pay. Nazrul said, “Why should
managers get all the profits, and regular employees; specially stockholders like us won’t get
anything? Because the stockholders own the firm. Shouldn’t management do what’s best for
stockholders? Something’s wrong!” Jibonanondo responded, “Well, maybe that explains why the
company hasn’t concerned itself with the stock price. Look, the only profits that stockholders
receive are in the form of cash dividends, and this firm has never paid dividends during its 12-year
history. We as stockholders therefore don’t directly benefit from profits. The only way we benefit
is for the stock price to rise.” Nazrul chimed in, “That probably explains why the firm is being
sued by Ministry of Environment & Forests for dumping pollutants in the adjacent river Surma.
Why spend money for pollution control? It increases costs, lowers profits, and therefore lowers
management’s earnings!”

Jibonanondo and Nazrul realized bus had reached the destination. Before leaving, they decided to
meet the next day to continue their discussion.

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 My Findings

A. What is the current goal of Sylhet Paper Mills as a business?

Answer: As a business, Sylhet Paper Mills is currently focusing to maximize its profits.

B. Considering Sylhet Paper Mills are being poorly managed (financially), what should be the
new goal and why?
Answer: Maximizing stockholder’s wealth should be the new goal for Sylhet Paper Mills.
Because, by increasing stockholder’s wealth that means increasing the market price of stock,
it will increase the value of the firm. It is important we all know that a dollar today and a dollar
one-year latter do not have the same meaning. Profit maximization can help Sylhet Paper Mills
to achieve their short-term goals. But, if they want to survive in the market for longer period,
they must switch their goal into wealth maximization of stockholders.

C. Do you think the firm has agency problem? Support your opinion.
Answer: As per my observation from the above passage, I think the firm is experiencing
agency problem between stockholders and managements. Agency problem occures when
managements work in their own way in order to achieve their goals rather than the interest of
stockholders.
Managements of Sylhet Paper Mills did not work in accordance to the interest that stockholders
want. Though, management had been increasing the company’s profit year by year according
to the situation from above passage, but stockholders did not received any cash dividend for
12 years of the firm’s operation history. Beacuase, managements were more concerned about
maximizing profit. Secondly, stockholders always expect to get a return from their investment
and when it does not fulfill their expectation level, they feel demotivated on re-investment.

D. Does the firm have an effective corporate governance structure? If not, what are the gaps?
Answer: Sylhet Paper Mills has an ineffective corporate governance structure. Because, there
is no board of director in this firm. For this gaps, managements of Sylhet Paper Mills had taken
it as an advantage to make any decision which favors them a lot. That’s why, this firm has been
doing badly in its financial part as well as not able to increase the stock price over the past 9

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 months. In addition, I can say that managements of Sylhet Paper Mills had deliberately
mentioned false information to stockholders about their financial statement.

E. On the basis of the information provided, what specific recommendations would you offer the
firm?
Answer: After getting information from the above passage, there are some proposals I am
going to mention in the following so that Sylhet Paper Mills can follow this for future
improvement:
• The first thing Sylhet Paper Mills has to do is that Board of Director (BOD) must be
formulated. It will help Sylhet Paper Mills to overcome from its bad financial performance.
Because, board of directors will take over all powers from managements of Sylhet Paper
Mills and they (BOD) will appoint new management (CEO), set new rules, regulations,
objective (wealth maximization as a new goal) and advise or assign new task to newly
formed management. In addition, board of directors have the power to investigate against
those members of management who committed fraudulent activities.
• Some factors should be introduced for newly formed managements in order to minimize
agency problem from the firm. These are given below:
A. Granting of stock could be a good example as an incentive plan for management instead
of giving any portion from the profit.
B. Managements could also be rewarded by performance share or cash bonus depending
on the level at which performance targets are achieved.
• If Sylhet Paper Mills want to survive from the bankruptcy, they must change their current
goal and focus on increasing shareholder’s wealth that helps them to grow the value of the
firm. It will also assist them to gain capital when they want to sell their stock to others.
• Producing more units of good will increase their stock price! It is very common
recommendation and sometimes it does not work like that. Because, producing more units
of good will also require more raw material which will rise their cost of good solds. For
that reason, to increase stock price, it is best way for the firm to adopt competitive
advantage which lead to more profits, better cashflow and thererfore achieve wealth
creation.

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