FIN 402 Week 3 Case ProblemsCase Problem 6.1 Sara Decides to Tak.docx

FIN 402 Week 3 Case Problems
Case Problem 6.1 Sara Decides to Take the Plunge
1. LG 1
2. LG 6
Sara Thomas is a child psychologist who has built a thriving
practice in her hometown of Boise, Idaho. Over the past several
years she has been able to accumulate a substantial sum of
money. She has worked long and hard to be successful, but she
never imagined anything like this. Even so, success has not
spoiled Sara. Still single, she keeps to her old circle of friends.
One of her closest friends is Terry Jenkins, who happens to be a
stockbroker and who acts as Sara’s financial advisor.
Not long ago Sara attended a seminar on investing in the stock
market, and since then she’s been doing some reading about the
market. She has concluded that keeping all of her money in low-
yielding savings accounts doesn’t make sense. As a result, Sara
has decided to move part of her money to stocks. One evening,
Sara told Terry about her decision and explained that she had
found several stocks that she thought looked “sort of
interesting.” She described them as follows:
· North Atlantic Swim Suit Company. This highly speculative
stock pays no dividends. Although the earnings of NASS have
been a bit erratic, Sara feels that its growth prospects have
never been brighter—“what with more people than ever going to
the beaches the way they are these days,” she says.
· Town and Country Computer. This is a long-established
computer firm that pays a modest dividend yield (of about
1.50%). It is considered a quality growth stock. From one of the
stock reports she read, Sara understands that T&C offers
excellent long-term growth and capital gains potential.
· Southeastern Public Utility Company. This income stock pays
a dividend yield of around 5%. Although it’s a solid company, it
has limited growth prospects because of its location.
· International Gold Mines, Inc. This stock has performed quite

well in the past, especially when inflation has become a
problem. Sara feels that if it can do so well in inflationary
times, it will do even better in a strong economy. Unfortunately,
the stock has experienced wide price swings in the past. It pays
almost no dividends.
Questions
a. What do you think of the idea of Sara keeping “substantial
sums” of money in savings accounts? Would common stocks
make better investments for her than savings accounts? Explain.
Answer: It is not a smart idea for Sara to retain substantial sums
of money in her savings account for the reason that she could
potentially make more money by investing in stocks. For
example, the average rate for a savings account is 0.06%, and if
you invest in stock, you can make anywhere from 0-15%
depending on the amount of risk you is willing to take.
b. What is your opinion of the four stocks Sara has described?
Do you think they are suitable for her investment needs?
Explain.
Answer: Three out of the four stocks are ok investments to
make since there is so little information provided. I do not think
the NASS is a good investment because the stock pays no
dividends and their earnings have been erratic. If Sara wants to
make more money for her investments, she needs to find a
company that has better growth potential and dividend payouts.
c. What kind of common stock investment program would you
recommend for Sara? What investment objectives do you think
she should set for herself, and how can common stocks help her
achieve her goals?
Answer: The IPA program would be the program I would
recommend to Sara because it allows Sara to take classes and
speak with educated individuals who know about investing. I
think Sara should sit down with a financial advisor and figure
out exactly what she wants to do with her money and how much
she wants to make from her investments. Common stocks can

help her reach her goal faster because they offer a higher return
than a savings account.
Case Problem 6.2 Wally Wonders Whether There’s a Place for
Dividends
1. LG 5
Year
Expected EPS ($)
Expected Dividend Payout Ratio (%)
2016
$3.25
40%
2017
$3.40
40%
2018
$3.90
45%
2019
$4.40
45%
2020
$5.00
45%
2. LG 6
Wally Wilson is a commercial artist who makes a good living
by doing freelance work—mostly layouts and illustrations—for
local ad agencies and major institutional clients (such as large
department stores). Wally has been investing in the stock
market for some time, buying mostly high-quality growth stocks
as a way to achieve long-term growth and capital appreciation.
He feels that with the limited time he has to devote to his
security holdings, high-quality issues are his best bet. He has
become a bit perplexed lately with the market, disturbed that
some of his growth stocks aren’t doing even as well as many
good-grade income shares. He therefore decides to have a chat

with his broker, Al Fried.
During their conversation, it becomes clear that both Al and
Wally are thinking along the same lines. Al points out that
dividend yields on income shares are indeed way up and that,
because of the state of the economy, the outlook for growth
stocks is not particularly bright. He suggests that Wally
seriously consider putting some of his money into income
shares to capture the high dividend yields that are available.
After all, as Al says, “the bottom line is not so much where the
payoff comes from as how much it amounts to!” They then talk
about a high-yield public utility stock, Hydro-Electric Light and
Power. Al digs up some forecast information about Hydro-
Electric and presents it to Wally for his consideration:
The stock currently trades at $60 per share. Al thinks that
within five years it should be trading at $75 to $80 a share.
Wally realizes that to buy the Hydro-Electric stock, he will have
to sell his holdings of CapCo Industries—a highly regarded
growth stock that Wally is disenchanted with because of recent
substandard performance.
Questions
a. How would you describe Wally’s present investment
program? How do you think it fits him and his investment
objectives?
Answer: Wally has a good investment program right because
high-quality growth stocks are a good way to make money, but
he needs to change the type of stock he is invested in because it
is not meeting up to his expectations. His investments are for
long-term, which is what he is looking for.
b. Consider the Hydro-Electric stock.
1. Determine the amount of annual dividends Hydro-Electric
can be expected to pay over the years 2016 to 2020.
Answer:
Year
Expected EPS
Payout Ratio

Divided
2016
$3.25
40%
$1.30
2017
$3.25
40%
$1.30
2018
$3.25
45%
$1.46
2019
$3.25
45%
$1.46
2020
$3.25
45%
$1.46
2. Compute the total dollar return that Wally will make from
Hydro-Electric if he invests $6,000 in the stock and all the
dividend and price expectations are realized.
Answer:
Year
Dividends Share
Share
Shares Value
2016
$1.30
100
$130.00
2017
$1.36

100
$136.00
2018
$1.76
100
$176.00
2019
$1.98
100
$198.00
2020
$2.25
100
$225.00
3. If Wally participates in the company’s dividend reinvestment
plan, how many shares of stock will he have by the end of
2020? What will they be worth if the stock trades at $80 on
December 31, 2020? Assume that the stock can be purchased
through the dividend reinvestment plan at a net price of $50 a
share in 2016, $55 in 2017, $60 in 2018, $65 in 2019, and $70
in 2020. Use fractional shares, to 2 decimals, in your
computations. Also, assume that, as in part b, Wally starts with
100 shares of stock and all dividend expectations are realized.
Answer:
Year
Beginning shares
Price
Shares Value
Dividends
Dividends Per Share
2016
100.00
$1.30

$130.00
$50.00
2.60
2017
102.60
$1.36
$139.54
$55.00
2.54
2018
105.14
$1.76
$185.04
$60.00
3.08
2019
108.22
$1.98
$214.28
$65.00
3.30
2020
111.52
$2.25
$250.91
$70.00
3.58
END 2020
$80.00
SHARES END 2020
115.10
SHARE VALUE END 2020

$9,208.17
c. Would Wally be going to a different investment strategy if he
decided to buy shares in Hydro-Electric? If the switch is made,
how would you describe his new investment program? What do
you think of this new approach? Is it likely to lead to more
trading on Wally’s behalf? If so, can you reconcile that with the
limited amount of time he has to devote to his portfolio?
Answer: Wally will not be changing him the investment strategy
if he wants to purchase stock in Hydro-Electric. He would be
altering the way he is investing. It is a common practice
amongst aggressive investors in a long term goal. If Wally
changed back to investing in his long-term shares and invests
the way he usually does it. I think this new approach is a good
idea and if things work out, I believe it would lead to more
trading for him.
Case Problem 7.1 Some Financial Ratios Are Real Eye-Openers
1. LG 5
2. LG 6
Cash
$ 1,250
Accounts receivable
$ 8,000
Current liabilities
$10,000

Inventory
$12,000
Long-term debt
$ 8,000
Current assets
$21,250
Stockholders’ equity
$12,000
Fixed and other assets
$ 8,750
Total liabilities and
Total assets
$30,000
stockholders’ equity
$30,000
South Plains Chemical Company Balance Sheet ($ thousands)
Sales
$50,000
Cost of goods sold
$25,000
Operating expenses
$15,000
Operating profit
$10,000
Interest expense
$ 2,500
Taxes
$ 2,500
Net profit
$ 5,000
Dividends paid to common stockholders ($ in thousands)
$ 1,250
Number of common shares outstanding
5 million
Recent market price of the common stock

$ 25
South Plains Chemical Company Income Statement ($
thousands)
Jack Arnold is a resident of Lubbock, Texas, where he is a
prosperous rancher and businessman. He has also built up a
sizable portfolio of common stock, which, he believes, is due to
the fact that he thoroughly evaluates each stock he invests in.
As Jack says, “You can’t be too careful about these things!
Anytime I plan to invest in a stock, you can bet I’m going to
learn as much as I can about the company.” Jack prefers to
compute his own ratios even though he could easily obtain
analytical reports from his broker at no cost. (In fact, Bob
Smith, his broker, has been volunteering such services for
years.)
Recently Jack has been keeping an eye on a small chemical
stock. The firm, South Plains Chemical Company, is big in the
fertilizer business—which is something Jack knows a lot about.
Not long ago, he received a copy of the firm’s latest financial
statements (summarized here) and decided to take a closer look
at the company.
Questions
a. Using the South Plains Chemical Company figures, compute
the following ratios.
Latest Industry Averages
Latest Industry Averages
Liquidity
Profitability
a. Net working capital
N/A
h. Net profit margin
8.5%

b. Current ratio
1.95
i. Return on assets
22.5%
Activity
j. ROE
32.2%
c. Receivables turnover
5.95
Common-Stock Ratios
d. Inventory turnover
4.50
k. Earnings per share
$2.00
e. Total asset turnover
2.65
l. Price-to-earnings ratio
20.0
Leverage
m. Dividends per share
$1.00
f. Debt-equity ratio
0.45
n. Dividend yield
2.5%
g. Times interest earned
6.75
o. Payout ratio
50.0%
p. Book value per share
$6.25

q. Price-to-book-value ratio
6.4
b. Compare the company ratios you prepared to the industry
figures given in part a. What are the company’s strengths? What
are its weaknesses?
Answer: We can see that the SPC Company has a net working
capital of $ 11,250,000. It indicates that the SPC Company has
$ 11.25 million of working capital available to pay its bill and
grow the business. This value is a good sign for SPC Company
because it is a higher amount than the industry average. We also
can see the current ratio for SPC Company is 2.125 that are
more than 0.175 when compare to the industry average, 1.95. It
indicates that SPC Company can pay its accounts creditor on
time and get the discounts for prompt payment and credibility
from future supplies. SPC Company may able to do essential
maintenance and replacement of fixed assets, it will result in
reducing operating expenses, such that selling expenses and
depreciation expenses. Also, the company has a liquid cash for
a new investment project, which may increase the future growth
rate of the company. This ratio is a good sign for the company.
The receivables turnover for SPC Company is 6.25, which is
more than 0.3 when you compare it to the industry average of
5.95. It means that the SPC Company is collecting its accounts
receivable more quickly than the industry average. The SPC
Company can have a valuable discipline on credit control that
will possibly result in a bad debt decrease, which is good for
SPC Company. The inventory turnover for the SPC Company is
4.167, which is less than 0.333 when you are comparing it to the
industry average of 4.5. It might be because the SPC Company
may have too many inventories in hand than the industry
average. It is expensive because inventories take up costly
warehouse space, some inventories may become spoiled or
obsolete and also a high risk of stock pilferage. The total asset
turnover for SPC Company is 1.67 that is less than 0.98 when

you compare it to the industry average of 2.65. It indicates that
the company is not able to get any more sales out of its assets
than the industry average. The company should reduce the
selling price to achieve higher sales volume since they are in a
very price competitive industry. When sales volume increase,
given no new investment in fixed assets, then the total asset
turnover will increase.
As for the compare profitability ratio, we can see that the net
profit margin, ROA, and ROE for SPC Company is 10%,
16.67%, 41.67% compared to the industry average of 8.5%,
22.5%, and 32.2% respectively. The results are mixed. When
compared to common stock ratios the dividends per share for
SPC Company is $ 0.25 that is less than $ 0.75 when compared
to the industry average of $ 1.00. Some dividends paid out to
the common stockholder is less than the average. Also, the
dividend yield for SPC Company is 1 % that is less than 1.5 %
when you compare it to the industry average of 2.5 %. It
indicates that the rate of current income earned on the
investments dollar is less than the average. Moreover, the
price-to-book-value for SPC Company is 10.40 that are higher
4.0 when compare to the industry average, 6.4. It indicates that
the stock for SPC Company is overpriced than average.
c. What is your overall assessment of South Plains Chemical?
Do you think Jack should continue with his evaluation of the
stock? Explain
Answer: No, the stock for SPC Company is overpriced. We can
see the fact from the price-to-book-value for SPC Company is
10.42 that are higher 4.0 when compare to the industry average,
6.4.
Case Problem 7.2 Doris Looks at an Auto Issue
Doris Wise is a young career woman. She lives in Phoenix,
Arizona, where she owns and operates a highly successful
modeling agency. Doris manages her modest but rapidly
growing investment portfolio, made up mostly of high-grade
common stocks. Because she’s young and single and has no
pressing family requirements, Doris has invested primarily in

stocks that offer the potential for attractive capital gains. Her
broker recently recommended an auto company stock and sent
her some literature and analytical reports to study. One report,
prepared by the brokerage house she deals with, provided an up-
to-date look at the economy, an extensive study of the auto
industry, and an equally extensive review of several auto
companies (including the one her broker recommended). She
feels strongly about the merits of security analysis and believes
it is important to spend time studying a stock before making an
investment decision.
Questions
a. Doris tries to stay informed about the economy on a regular
basis. At the present time, most economists agree that the
economy is getting stronger. What information about the
economy do you think Doris would find helpful in evaluating an
auto stock? Prepare a list—and be specific. Which three items
of economic information (from your list) do you feel are most
important? Explain.
Answer: The majority of economists would agree that a strong
economy would affect a company positively. Other factors that
Doris should take into consideration before she invests are the
following:
1- Jobs and Unemployment - You have to look at the current
unemployment rate. People have to be working to qualify for
loans to finance or purchase a car.
2- Interest Rates - The interest rate has to be low to entice the
consumer to borrow money to purchase a car. When rates are
high consumers are less likely to purchase or finance a car.
3- Inflation Rate – Once the price of items starts to go up,
many consumers may start to grow concerned about inflation.
Once people are concerned about inflation, it starts to affect
your investments negatively.
4- Taxes: A tax break can offer savings and incentives
through tax credits, deductions and exemptions to order to boost
spending.

5- Labor Relations: Labor relations are important because
many automakers in the US have to deal with unions and union
influence. How they negotiate pay, medical benefits, and
retirement benefits has a big impact on how they do business
and how they keep their costs in line. But any change in cost
from paying higher wages and benefits usually gets passed on to
the consumer. Higher prices will mean lower sales.
The most important economic factors I feel is inflation and
unemployment. The reason they are the most important is
without a job nobody can buy a car and inflation lowers a
person buying power which makes them less likely to purchase
a car because they may feel the price is too high. It will all
impact the car sales.
b. In relation to a study of the auto industry, briefly note the
importance of each of the following.
1. Auto imports
Answer: Imported automobiles and those built by foreign
manufacturers in the U.S have had a tremendous impact on the
domestic industry. Imported automobile have a significant part
of the market, and this goes to domestic company end up losing
revenue.
2. The United Auto Workers union
Answer: Their unions are known to be aggressive when
negotiating for labor benefits.
3. Interest rates
Answer: The average price of a new car now is close to the
uppers $30,000, so it’s no surprise that consumers increasingly
finance their purchases with loans that last from 5 to 7 years.
When interest rates are lower people are willing to borrow more
money to purchase big items. When people are paying less
interest, it gives them more money to spend and when a
consumer has more money to spend that means good news for
companies that sell big ticket items like cars and homes.
4. The price of a gallon of gas
Answer: The price of a gallon of gas will reduce the number of

cars sales depending on what types of cars the company is
selling. Also if the gallon of gas is high, consumers are
spending more money to purchase gas than purchasing cars.
c. A variety of financial ratios and measures are provided about
one of the auto companies and its stock. These are incomplete,
however, so some additional information will have to be
computed. Specifically, we know the following:
Net profit margin
15%
Total assets
$25 billion
Earnings per share
$3.00
Total asset turnover
1.5
Net working capital
$3.4 billion
Payout ratio
40%
Current liabilities
$5 billion
Price-to-earnings ratio
12.5
Given this information, calculate the following:
1. Sales
Answer:
Total Assets Turnover * Total Assets =
1.5 * $25 Billion= $37.5 Billion
2. Net profits after taxes
Answer:
Net Profit Margin * Sales
15% X $ 37.5 = $5.625 billion
3. Current ratio
Answer:
Current assets = Net working cap + Current liabilities

$3.4 +$5 billion = $ 8.4 Billion
Current assets / Current liabilities = Current ratio
$ 8.4 billion÷ $5 billion= 1.68
4. Market price of the stock
Answer:
Price-to-earnings ratio*Earnings per share
12.5 X $3.00= $37.5 per share
5. Dividend yield
Answer:
(Earnings per share * Payout ratio) ÷ Market price of the stock
($3 X 40%) ÷$37.5= 0.032
0.032 X 100 =3.2%
Case Problem 8.1 Chris Looks for a Way to Invest His Wealth
1. LG 1
2. LG 2
3. LG 4
Chris Norton is a young Hollywood writer who is well on his
way to television superstardom. After writing several successful
television specials, he was recently named the head writer for
one of TV’s top-rated sitcoms. Chris fully realizes that his
business is a fickle one, and on the advice of his dad and
manager, he has decided to set up an investment program. Chris
will earn about a half-million dollars this year. Because of his
age, income level, and desire to get as big a bang as possible
from his investment dollars, he has decided to invest in
speculative, high-growth stocks.
Chris is currently working with a respected Beverly Hills broker
and is in the process of building up a diversified portfolio of
speculative stocks. The broker recently sent him information on
a hot new issue. She advised Chris to study the numbers and, if
he likes them, to buy as many as 1,000 shares of the stock.
Among other things, corporate sales for the next three years
have been forecasted as follows:
Year
Sales ($ millions)

1
$22.5
2
$35.0
3
$50.0
The firm has 2.5 million shares of common stock outstanding.
They are currently being traded at $70 a share and pay no
dividends. The company has a net profit rate of 20%, and its
stock has been trading at a P/E of around 40 times earnings. All
these operating characteristics are expected to hold in the
future.
Questions
a. Looking first at the stock:
1. Compute the company’s net profits and EPS for each of the
next 3 years.
Answer:
Year 1
120/100) * 22.5 = $27 million
Therefore 27-22.5= $4.5 million
Profit= 4.5/70
= $64,285.71
Year 2
20% * 35.0 = $7
$7 million/70
Profit= $100,000
Year 3
20% of 50 = $ 10 million
10million/70
Profit = $142857.14285
2. Compute the price of the stock three years from now.
Answer:
Price of stocks= total profits for 3 years + total sales
= (4.5+7+10) + 107.5
= $129 million
3. Assuming that all expectations hold up and that Chris buys

the stock at $70, determine his expected return on this
investment.
Answer:
$ Stock= $ 70.00
Total sales = $107.5 million
Return = $107,500,000/70
=$535,714.29
Profit= 20% of $535,714.29
= $107,142.85
Total return= $535,714.29+$10,712.85
= $546,427.14
4. What risks is he facing by buying this stock? Be specific.
Answer: The earning per share is not stable, and therefore Chris
might run into high percentage loss. The 40% times earning
will, therefore, be tempered which will make the investment
drop.
5. Should he consider the stock a worthwhile investment
candidate? Explain.
Answer: Yes, The EPS from the previous years have constantly
been increasing, and therefore this shows a significant increase
and the net profit.
b. Looking at Chris’s investment program in general:
1. What do you think of his investment program? What do you
see as its strengths and weaknesses?
Answer: Constant change to EPS is the only weakness if not so,
therefore, this program is good.
2. Are there any suggestions you would make?
Answer: The suggestion I would make is to determine the
appropriate asset allocation. Chris needs to have a strategy
whereby the input should remain a hundred percent.
3. Do you think Chris should consider adding foreign stocks to
his portfolio? Explain.
Answer: I would say yes because I think it will amplify the
expansion of Chris’ investments and therefore increasing the
input per EPS.
Case Problem 8.2 An Analysis of a High-Flying Stock

1. LG 2
2. LG 6
Marc Dodier is a recent university graduate and a security
analyst with the Kansas City brokerage firm of Lippman,
Brickbats, and Shaft. Marc has been following one of the hottest
issues on Wall Street, C&I Medical Supplies, a company that
has turned in an outstanding performance lately and, even more
important, has exhibited excellent growth potential. It has five
million shares outstanding and pays a nominal annual dividend
of $0.05 per share. Marc has decided to take a closer look at
C&I to assess its investment potential. Assume the company’s
sales for the past five years have been as follows:
Year
Sales ($ millions)
2012
$10.0
2013
$12.5
2014
$16.2
2015
$22.0
2016
$28.5
Marc is concerned with the future prospects of the company, not
its past. As a result, he pores over the numbers and generates
the following estimates of future performance:
Expected net profit margin
12%
Estimated annual dividends per share
5¢
Number of common shares outstanding
No change
P/E ratio at the end of 2017
35
P/E ratio at the end of 2018

50
Questions
a. Determine the average annual rate of growth in sales over the
past five years. (Assume sales in 2011 amounted to $7.5
million.)
1. Use this average growth rate to forecast revenues for next
year (2017) and the year after that (2018).
Answer:
Year
Growth Rate
2012 to 2013
( 12.5 – 10.0 )/10.0 = 0.250
2013 to 2014
( 16.2 – 12.5 )/12.5 = 0.296
2014 to 2015
( 22.0 – 16.2 )/16.2 = 0.358
2015 to 2016
( 28.5 – 22.0 )/22.0 = 0.296
250 + .296 + .358 + .296 / 4 = .30
Average Annual Growth Rate = 30%
2. Now determine the company’s net earnings and EPS for each
of the next two years (2017 and 2018).
Answer:
Earnings in 2017
Sales x Profit margin
$37,000,000 x 0.12
= $4,440,000
Earnings in 2018
Sales x Profit margin
$48,100,000 x 0.12

= $5,772,000
EPS: 2017
$4,440,000 / 5,000,000 = $0.89
= $0.89
EPS: 2018
$5,772,000 / 5,000,000 = $1.15
= $1.15
3. Finally, determine the expected future price of the stock at
the end of this two-year period.
Answer:
P/E ratio for 2006 = 50
Share Price, 2006
P/E ratio for 2006 x 2006 EPS
50 x $1.15 = $57.50
$57.50 Share Price
b. Because of several intrinsic and market factors, Marc feels
that 25% is a viable figure to use for a desired rate of return.
1. Using the 25% rate of return and the forecasted figures you
came up with in question a, compute the stock’s justified price.
Answer:
Price of the share
We can calculate the price of the share by using PE ratio
PE ratio is MPS/EPS i.e market price of share to earnings per
share

for 2017= PE ratio is given as 35
35=MPS/0.89376
MPS=31.28
For 2018
50=MPS/1.1676
MPS=58.38
2. If C&I is currently trading at $32.50 per share, should Marc
consider the stock a worthwhile investment candidate? Explain.
Answer:
The stock is currently trading for $32.5 per share which is less
than the value we have calculated. so Marc should consider it as
a worthwhile investment because the MPS is going to pick up
more in future.
Case Problem 9.2 Deb Takes Measure of the Market
1. LG 5
Several months ago, Deb Forrester received a substantial sum of
money from the estate of her late aunt. Deb initially placed the
money in a savings account because she was not sure what to do
with it. Since then, however, she has taken a course in
investments at the local university. The textbook for the course
was, in fact, this one, and the class just completed this chapter.
Excited about what she has learned in class, Deb has decided
that she definitely wants to invest in stocks. But before she
does, she wants to use her newfound knowledge in technical
analysis to determine whether now would be a good time to

enter the market.
Deb has decided to use all of the following measures to help her
determine if now is, indeed, a good time to start putting money
into the stock market:
· Advance-decline line
· New highs-new lows indicator (Assume the current 10-day
moving average is 0 and the last 10 periods were each 0.)
· Arms index
· Mutual fund cash ratio
Deb goes to the Internet and, after considerable effort, is able to
put together the accompanying table of data.
Questions
a. Based on the data presented in the table, calculate a value
(where appropriate) for periods 1 through 5, for each of the four
measures listed above. Chart your results, where applicable.
Answer:
The Arms index = (The number of advancing stocks/The number
of declining stocks)/(The composite volume of advancing
stocks/The composite volume of declining stocks)
Arms Index[(Advancing issues(NYSE)/Declining issues
(NYSE))/(Volume up/Volume down) 0.525821596
0.20439551 1.91830855 0.696730457 0.39463639
b. Discuss each measure individually and note what it indicates
for the market, as it now stands. Taken collectively, what do
these four measures indicate about the current state of the
market? According to these measures, is this a good time for
Deb to consider getting into the market, or should she wait a
while? Explain.
Answer:
It is fairly bullish for investment purpose in period 1
period2period 4 and period 5 since Arms index is below 1.
Anything above 1as in the case of period 3 is considered

bearish. An Arms index of1 is said to be balanced market.
Period 1 Period 2 Period 3 Period 4 Period
5
Mutual Fund Cash
ratio(MututalFund
cash/Total Assets) 4% 5% 7% 9%
10%
c. Comment on the time periods used in the table, which are not
defined here. What if they were relatively long intervals of
time? What if they were relatively short? Explain how the
length of the time periods can affect the measures.
Answer:
Mutual fund cash ratio is below 5% for period 1 which seems
fairly bullish. The perspective remains balanced for period
2.However since Mutual fund cash ratio is above 5% for period
3period 4 Period 5, the sentiment is fairly bearish and not
advisable for making investments under these periods.
A/D Line = (No of Advancing Stocks - No of Declining Stocks)
+ Previous Period's A/D Line Value
Period 1 Period 2 Period 3 Period 4 Period
5
AD Line
(Advancing
Issues
(NYSE)-
Declining issues
(NYSE) -1,010 -1,704 -2,414 -1,832
-1,224

As per AD Line, The Sentiment is fairly bearish with regard to
all periods and hence investment should be avoided.
Period 1
Period 2
Period 3
Period 4
Period 5
Dow Jones Industrial Average
8,300
7,250
8,000
9,000
9,400
Dow Transportation Average
2,375
2,000
2,000
2,850
3,250
New highs
$ 68
$ 85
$ 85
$ 120
$ 200
New lows
$ 75
$ 60
$ 80
$ 75
$ 20
Volume up
600,000,000

836,254,123
275,637,497
875,365,980
1,159,534,297
Volume down
600,000,000
263,745,877
824,362,503
424,634,020
313,365,599
Mutual fund cash (trillions of dollars)
$0.31
$0.32
$0.47
$0.61
$0.74
Total assets managed (trillions of dollars)
$6.94
$6.40
$6.78
$6.73
$7.42
Advancing issues (NYSE)
1,120
1,278
1,270
1,916
1,929
Declining issues (NYSE)
2,130
1,972
1,980
1,334
1,321

Contingency Leadership Theories
Chapter 4
Part One: Individuals As Leaders
4 - ‹#›
© 2016 Cengage Learning. All Rights Reserved. May not be
copied, scanned, or duplicated, in whole or in part, except for
use as permitted in a license distributed with a certain product
or service or otherwise on a password-protected website for
classroom use.
1
Learning Outcomes 1 – 5
State the major difference between behavioral and contingency
leadership theories, and explain the behavioral contribution to
contingency theories.
Describe the contingency leadership theory variables.
Identify the contingency leadership model styles and variables.
State the leadership continuum model major styles and
variables.
Identify the path-goal leadership model styles and variables.
4 - ‹#›
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2
Learning Outcomes 6 – 10
State the normative leadership model styles and the number of
variables.
Discuss the major similarities and differences between the
behavioral and contingency leadership theories.
Compare and contrast four major differences among the four
contingency leadership models.
List which leadership models are prescriptive and descriptive,
and explain why they are classified as such.
Explain substitutes and neutralizers of leadership.
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3
Leadership Theories
versus Leadership Models
Recall, a leadership theory is an explanation of some aspect of
leadership.
Theories have practical value because they help us better
understand, predict, and control successful leadership.
A leadership model is an example for emulation or use in a
given situation.
All of the contingency leadership theories in this chapter have a
leadership model.
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Framework for Contingency Leadership Variables
Exhibit 4.1
Effective leaders have an appropriate fit between the leader’s
behavior and style and the followers and the situation.
This list of general contingency leadership variables can be
used as a framework to place all the contingency leadership
model variables for analyzing leadership.
Exhibit 4.1
classroom use.
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Global Contingency Leadership
Contingency leadership is important to today’s global economy.
Global companies realize successful leadership styles vary
greatly from place to place.
Effective leaders of today need multicultural backgrounds and
experiences.
This reinforces the message of the global contingency
leadership.
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Contingency Leadership Theory
In 1951, Fred E. Fiedler developed the first situational
leadership theory.
Fiedler called the theory “Contingency Theory of Leader
Effectiveness”.
He was the first to develop a model to match the leadership
style to the job.
He believed leadership style is a reflection of personality and
behavior, and that leadership styles are basically constant.
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Discussion Question
Do you agree with Fiedler’s belief that people have one
dominant leadership style and cannot change styles? Explain
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Contingency Leadership Model Variables within the
Contingency Leadership Framework
Exhibit 4.2

The contingency leadership model is used to determine if a
person’s leadership style is task- or relationship-oriented, and if
the situation (leader-member relationship, task structure, and
position power) matches the leader’s style to maximize
performance.
Exhibit 4.2
classroom use.
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Leadership Style and the LPC
When using Fiedler’s model, first determine if your dominate
leadership style is:
Task-motivated,
Gain satisfaction from task completion.
Relationship motivated.
Gain satisfaction through forming and maintaining relationships
with followers.
To determine leadership style, complete the least-preferred
coworker (LPC) scales.
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Situational Favorableness
Situational favorableness refers to the degree to which a
situation enables the leader to exert influence over the
followers.
Leader-member relations:
Better relations lead to more favorable situations.
Task structure:
Structured jobs mean more favorable situations.
Position power:
The more power, the more favorable the situation.
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Determining the Appropriate
Leadership Style
Use Fiedler’s contingency theory model to determine which
style is appropriate.
If your LPC matches appropriate style, do nothing.
If you need to change styles, some examples:
Improve relations – show more interest in followers.
Structure the task – give clear deadlines.
Empower followers – leaders can pass along power.
Autocrat – leaders with weak power can gain power.
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Fiedler Contingency Leadership Model
Exhibit 4.3
Exhibit 4.3
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Research, Criticism, and Applications
Critics say research supports the model in most situations but
not as strongly in field studies as in lab studies.
Fiedler’s view of changing the job context is not always easy
say critics.
But the model has application as it can explain why some
managers are ineffective – no match of style to context.
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Leadership Continuum Model Variables within the Contingency
Leadership Framework
Exhibit 4.4
Robert Tannenbaum and Warren Schmidt developed a
contingency theory – 1950’s.
Focus is on who makes the decisions.

Exhibit 4.4
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Tannenbaum and Schmidt’s Leadership Continuum Model
Exhibit 4.5
The leadership continuum model is used to determine which one
of seven styles to select, based on the use of boss-centered
versus subordinate-centered leadership, to meet the situation
(boss, subordinates, situation/time) to maximize performance.
Exhibit 4.5
classroom use.
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Leadership Continuum Model
Before selecting one of the seven leadership styles, consider
three variables:
Boss – based on personality and behavior, some bosses are
autocrats, some participative.

Subordinates – the more willing/able followers are to
participate, the more participation should be used – and vice
versa.
Situation (time) – size, etc. of organization is considered, time
is needed for participation.
Criticism – unclear when/how to use the model.
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Discussion Question
Do you believe that managers today are using more boss- or
subordinate-centered leadership styles?
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Path-Goal Leadership Model Variables within the Contingency
Exhibit 4.6
Developed by Robert House.
Behavior of the leader influences performance and satisfaction
of the followers.
Exhibit 4.6

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House Path-Goal Leadership Model
Exhibit 4.7
The path-goal leadership model is used to select the leadership
style (directive, supportive, participative, or achievement-
oriented) appropriate to the situation (subordinate and
environment) to maximize both performance and job
satisfaction.
Exhibit 4.7
classroom use.
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Path-Goal Leadership Theory
and Model
The leader is responsible for motivating followers to attain
organizational goals.
Motivation is increased by:
Clarifying follower’s path to the rewards, or
Increasing the rewards followers value/desire.
Path clarification means the leader works with followers to

identify and learn behaviors that lead to accomplishment and
reward.
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Situational Factors - Subordinate
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Authoritarianism
Extent employees defer to others.
Locus of Control
Extent employees believe they control goal achievement
(internal) or it is controlled by others (external).
Ability

Extent of employees’ ability to perform tasks and achieve goals.
Situational Factors - Environment
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Task Structure
Extent of job repetitiveness.
Formal Authority
Extent of leader’s position power.
Work Group
Extent coworkers contribute to job satisfaction.

Path-Goal Leadership Styles
Directive:
Leader provides high structure.
Supportive:
Leaders provides high consideration.
Participative:
Leader includes employee input into decision-making.
Achievement-Oriented:
Leader sets difficult but achievable goals, and
Makes the job challenging.
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Research supports path-goal theory but with mixed results –
inadequately tested due to complexity.
Criticized by managers because it is difficult to know which
style to use.
Led to the theory of charismatic leadership.
House broadened his theory and now calls it value-based
leadership theory.
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Normative Leadership Model Variables within the Contingency
Exhibit 4.8
Victor Vroom and Philip Yetton asked:
When should the manager take charge and when should the
manager let the group make the decision?
Exhibit 4.8
classroom use.
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Normative Leadership Model
The normative leadership model has a time-driven and
development-driven decision tree that enables the user to select
one of five leadership styles (decide, consult individually,
consult group, facilitate, and delegate) appropriate for the
situation (seven questions/variables) to maximize decisions.
Called normative model as it provides a sequential set of
questions that are rules (norms) that help determine the best
leadership style for the situation.
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Leadership Participation Styles
Decide:
Leader makes the decision and announces it.
Consult Individually:
Leader individually tells followers the problem, gets
suggestions, and then decides.
Consult Group:
Leader holds group meeting, tells followers the problem, gets
suggestions, and then decides.
Facilitate:
Leader facilitates group meeting, seeking participation and
concurrence, without pushing his/her ideas.
Delegate:
Lets the group diagnose problem and make the decision.
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Model Questions
Decision Significance:
Is the decision critical to the project or organization?
Importance of Commitment:
Is follower commitment vital for implementation?
Leader Expertise:
Is the leader experienced in this type of decision?
Likelihood of Commitment:
Are followers already committed to the decision?
Group Support for Objectives:
Do followers support the organizational goals?
Group Expertise:

Are group members experienced in this type of decision?
Team Competence:
Ability of individuals to work together as a team.
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Normative Leadership Time-Driven Model
Exhibit 4.9
Instructions: The model is a decision tree that works like a
funnel. Define the problem statement and then answer the
questions from left to right as high (H) or low (L), skipping
questions when not appropriate to the situation and avoiding
crossing any horizontal lines. The last column you come to
contains the appropriate leadership participation decision-
making style for the situation.
Focus – making effective decisions with minimum cost.
Value – is placed on time, no value on follower development.
Orientation – short-term.
Exhibit 4.9
classroom use.
4 - ‹#›
Discussion Question

Do you agree that time is an important situational factor to
consider in selecting a leadership style for the situation?
Explain.
4 - ‹#›
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Normative Leadership
Development-Driven Model
Exhibit 4.10
Instructions: The model is a decision tree that works like a
funnel. Define the problem statement, then answer the questions
from left to right as high (H) or low (L), skipping questions
when not appropriate to the situation and avoiding crossing any
horizontal lines. The last column you come to contains the
appropriate leadership participation decision-making style for
the situation.
Focus – effective decisions and maximum follower
development.
Value – follower development, no value on time.
Orientation – long-term.
Exhibit 4.10
classroom use.
4 - ‹#›

Discussion Question
The normative leadership model is the most complex.
Do more variables improve the model?
4 - ‹#›
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Appropriate Leadership Style
To use the normative model:
you must have a specific decision to make,
the authority to make the decision, and
followers to participate in the decision.
Use the best model for the situation and ask appropriate
questions.
Some questions may be skipped.
Follow the decision tree to find best style.
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Research supports the model with a move toward higher levels
of participation, greater empowerment, and use of teams.
Critics say the model treats decisions as single episodes and
assumes leaders can effectively use all five leadership styles.
Not popular with managers who find it too cumbersome.
Popular in the academic community.

4 - ‹#›
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Discussion Question
One group of authors believes that Fiedler’s contingency
leadership model is the model best supported by research.
However, a different author believes that it is the normative
leadership model.
Which model do you believe is best supported by research?
Why?
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Names Given to the Same Two Leadership Behavior Concepts
Exhibit 4.11
Exhibit 4.11

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Putting the Behavioral and Contingency Leadership Theories
Together
Exhibit 4.12
Exhibit 4.12
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Prescriptive and Descriptive Models
Prescriptive leadership models tell the user exactly which style
to use in a given situation.
Contingency and normative leadership models.
Descriptive leadership models identify contingency variables
and leadership styles without specifying which style to use in a
given situation.
Continuum and path-goal leadership models.
4 - ‹#›
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Substitutes for Leadership Variables within the Contingency

Exhibit 4.13
Substitutes for leadership include characteristics of the
subordinate, task, and organization that replace the need for a
leader or neutralize the leader’s behavior.
Exhibit 4.13
classroom use.
4 - ‹#›
Variables which substitute or neutralize leadership:
Characteristics of followers,
Ability, knowledge, experience, training, etc.
Characteristics of the task,
Clarity and routine, intrinsic satisfaction, etc.
Characteristics of the organization,
Formalization, flexibility, cohesive work groups, etc.
Substitutes and Neutralizers
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Leadership Style and Situation
Leaders can analyze how these characteristics substitute or
neutralize their leadership style.

Leaders can change the situation rather than their style.
Substitute leadership can be used to complement existing
leadership.
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Research supports some aspects of the theory, other aspects
remain untested.
Critics say for many substitutes, the formal leader is merely
replaced by similar leadership behavior – so it still exists.
Applications include strong evidence that situational variables
directly affect job satisfaction and motivation.
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Discussion Questions
Which contingency leadership theory do you think is the best?
Which contingency leadership theory do you actually plan to
use, and how?
If you don’t plan to use any, give a detailed reason for not
wanting to use any of the models.
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Key Terms
contingency leadership model
descriptive leadership models
leadership continuum model
leadership model
normative leadership model
path-goal leadership model
prescriptive leadership models
substitutes for leadership
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45
Leadership Behavior and Motivation
Chapter 3
Part One: Individuals as Leaders
3 - ‹#›

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1
Learning Outcomes
List the University of Iowa leadership styles.
Describe similarities and differences between the University of
Michigan and Ohio State University leadership models.
Discuss similarities and differences between the Ohio State
University Leadership Model and the Leadership Grid.
Discuss similarities and differences among the three content
motivation theories.
Discuss the major similarities and differences among the three
process motivation theories.
Explain the four types of reinforcement.
State the major differences among content, process, and
reinforcement theories.
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2
Leadership Behavior
By the late 1940’s leadership research had shifted from trait
theory paradigm to behavioral theory paradigm.
Focusing on what the leader says and does.
Researchers attempted to identify behavior of effective leaders.

Behavioral leadership theory made major contributions to
leadership research.
But it found there is no ‘one’ best style of leadership.
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3
Leadership Behavior is Based on Traits
Leaders’ behavior is based on their traits and skills.
Directly affecting their behavior and relationship with
employees.
Leading by example is important.
Behavior is easier to learn and change than traits.
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Leadership Style
Leadership style is the combination of traits, skills, and
behaviors leaders use as they interact with followers.
While based on traits and skills, the important component of a
leadership style is behavior.
Consistent patterns of behavior characterize a leader.
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University of Iowa Leadership Styles
Exhibit 3.1
Autocratic leadership style
The autocrat makes the decisions, tells employees what to do
and closely supervises workers.
Democratic leadership style
The democrat encourages participation in decisions, allows the
group to determine tasks and does not closely supervise
employees.
A leader’s style usually falls somewhere between autocrat and
democrat.
Exhibit 3.1
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University of Michigan
Leadership Model
Created and used the Survey of Organizations.
The University of Michigan Leadership Model thus identifies
two leadership styles: job-centered and employee-
centered.
Job-Centered Leadership Style has scales measuring goal

emphasis and work facilitation.
Employee-Centered Leadership Style has scales measuring
supportive leadership and interaction facilitation.
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University of Michigan
Leadership Model
Exhibit 3.2
Refers to the extent to which the leader takes charge to get the
job done.
Refers to the extent to which the leader focuses on meeting
employee needs and developing relationships.
Exhibit 3.2
classroom use.
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Ohio State University
Developed the Leader Behavior Description Questionnaire
(LBDQ).
Initiating structure behavior:
Same as job-centered – focuses on task completion.
Consideration behavior:

Same as employee-centered – focuses on meeting people’s
needs and developing relationships.
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The Ohio State University
Leadership Model
Exhibit 3.3
The Ohio State University Leadership Model identifies four
leadership styles:
low structure and high consideration,
high structure and high consideration,
low structure and
low consideration, and
high structure and low consideration.
Exhibit 3.3
classroom use.
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Differences, Contributions, and Applications of Leadership
Models
Differences between the models:
University of Michigan uses a continuum, making it one-

dimensional while Ohio State considers the two behaviors
independent, making it two-dimensional.
Contributions:
There is no one best leadership style in all situations.
Applications:
Self-assessment helps change behavior leading to more effective
performance and relationships.
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classroom use.
Which leadership model do you prefer?
Do you agree with the University of Michigan model (with two
leadership styles) or with the Ohio State model (with four
leadership styles)?
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The Leadership Grid
The Leadership Grid builds on the Ohio State and Michigan
studies.
Based on the same two leadership dimensions, here called:
Concern for production, and
Concern for people.
Measured on a scale from 1 to 9, giving 81 possible
combinations of concern.

The Leadership Grid identifies five leadership styles: 1,1
impoverished; 9,1 authority compliance; 1,9 country club; 5,5
middle of the road; and 9,9 team leader.
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Blake, Mouton, and McCanse
Leadership Grid
Exhibit 3.4
The impoverished leader (1,1) does the minimum required to
remain employed.
The authority compliance leader (9,1) focuses on getting the job
done but treats people like machines.
The country-club leader (1,9) maintains a friendly atmosphere
without regard to production.
The middle-of-the-road leader (5,5) strives to maintain
satisfactory performance and morale.
The team leader (9,9) strives for maximum performance and
employee satisfaction.
Exhibit 3.4
classroom use.
3 - ‹#›

High-High Leader Research
The high-high leader has concern for both production and
people, or
Team leadership style.
There is some support for the high-high leader style as the
universal theory.
However, it is not accepted as the one best style in all
situations.
3 - ‹#›
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Discussion Question
Do you agree with the Leadership Grid’s claim that the one best
leadership style is the team leader (9,9)?
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Behavioral Theory Contributions
Behavioral research led to the shift in paradigm to contingency
leadership theory.
A second contribution was the recognition that organizations
need both production and people leadership.
A third contribution supports coleadership.
One leader is production-oriented.
One leader is people-oriented.

3 - ‹#›
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Leadership and Motivation Theories
Motivation is anything that affects behavior in pursuing a
certain outcome.
Through the motivation process, people go from need to motive
to behavior to consequence to satisfaction or dissatisfaction.
3 - ‹#›
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The Motivation Process
Exhibit 3.5
Some need or want motivates all behavior.
Needs and motives are complex.
We don’t always know what our needs are.
Like traits, motives cannot be observed, but you can observe
behavior and infer the person’s motive.
(attribution theory)
Exhibit 3.5

classroom use.
3 - ‹#›
Major Motivation Theories
Exhibit 3.5
Exhibit 3.6
To see the relationship between the theories, we will look at
each separately then put them back together using the unifying
motivation process.
classroom use.
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Content Motivation Theories
Hierarchy of needs theory
Process Motivation Theories
Equity theory
Reinforcement Theory
Two-factor theory

Acquired needs theory
Expectancy theory
Goal-setting theory
Positive
Avoidance
Extinction
Punishment

Content motivation theories focus on explaining and predicting
behavior based on people’s needs. Includes:
Hierarchy of Needs Theory,
Two-Factor Theory, and
Acquired Needs Theory.
The key to successful leadership is to meet the needs of
employees while achieving organizational objectives.
3 - ‹#›
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Hierarchy of Needs Theory
In the 1940’s, Abraham Maslow developed his hierarchy of
needs theory based on these four assumptions.
Only unmet needs motivate.
People’s needs are arranged in order of importance (hierarchy)
from basic to complex.
No motivation to fulfill a higher-level need unless the lower-
level need(s) are met.
People have five classifications of needs.
3 - ‹#›
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Hierarchy of Needs
The hierarchy of needs theory proposes that people are
motivated through five levels of needs.

Physiological needs – basic needs.
Safety needs – safety and security.
Belongingness needs – also called social needs.
Esteem needs – focuses on ego, status, self-respect.
Self-actualization needs – reach one’s full potential.
Today, Maslow and others realize needs are not on a simple
five-step hierarchy.
3 - ‹#›
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How Organizations Motivate With
Hierarchy of Needs Theory
Exhibit 3.7
Exhibit 3.7
People have a need for more than just pay.
If there is no money for raises, provide inexpensive motivators
such as compliments.
Leaders must meet employees’ lower-level needs so they do not
dominate the motivational process.
classroom use.
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Two-Factor Theory

In the 1960’s Frederick Herzberg combined lower-level needs
he called hygiene or maintenance.
Higher-level needs he called motivators.
The two-factor theory proposes that people are motivated by
motivators rather than maintenance factors.
3 - ‹#›
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Maintenance and Motivators
Maintenance factors
Also called extrinsic motivators.
Extrinsic motivators include:
Pay,
Job security,
Working conditions,
Fringe benefits, and
Relationships.
Motivators
Also called intrinsic motivators.
Intrinsic motivators include:
Achievement,
Recognition,
Challenge, and
Advancement.
Better motivators than extrinsic factors.
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Two-Factor Motivation Theory
Exhibit 3.8
Exhibit 3.8
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3 - ‹#›
Motivating Employees With
Two-Factor Theory
Money as a motivator:
Money will not necessarily motivate employees to work harder.
Motivating with the Two-Factor Theory:
Under the new paradigm, pay is important but the best
motivators are intrinsic motivators.
Herzberg developed job enrichment, the process of building
motivators into the job.
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Acquired Needs Theory
Acquired needs theory proposes that people are motivated by
their need for achievement, power, and affiliation.

Motivating employees with a high n Ach:
Give them challenging tasks with clear objectives.
Motivating employees with a high n Pow:
Let them plan/control their jobs as much as possible.
Motivating employees with a high n Aff:
Let them work as part of a team.
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A Comparison of Content Motivation Theories
Exhibit 3.9
Exhibit 3.9
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3 - ‹#›
Balancing Work-Life Needs
Work-life balance is also called work-home and work-family
balance.
Life needs a healthy balance.
The global marketplace allows for around the clock work
causing work-life conflict.
Two things organizations are doing:
Providing on-site day care centers, and

Offering flextime.
3 - ‹#›
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Which of the three content motivation theories do you prefer?
Why?
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32
Process motivation theories focus on understanding how people
choose behavior to fulfill their needs. Include:
Equity theory,
Expectancy theory, and
Goal-setting theory.
Process motivation theories are more complex than content
motivation theories.
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Equity Theory
Equity theory proposes that people are motivated when their
perceived inputs equal outputs.
People compare their inputs and outputs to that of relevant
others and conclude if they are under-rewarded, over-rewarded,
or equitably rewarded.
When inequity is perceived, employees attempt to correct the
balance.
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Motivating With Equity Theory
When employees believe they are equitably rewarded, they are
not actively motivated.
When employees feel under-rewarded, they are demotivated.
Equity theory offers useful information:
Equity is based on perception,
Reward equitably, and
Reward high performance.
3 - ‹#›
classroom use.

Expectancy Theory
Based on Victor Vroom’s formula:
motivation = expectancy x instrumentality x valence
Expectancy theory proposes that people are motivated when
they believe they can accomplish the task, they will get the
reward, and the rewards for doing the task are worth the effort.
3 - ‹#›
classroom use.
3 - ‹#›
classroom use.
Expectancy Theory Assumptions:
Internal and external factors affect behavior.
Behavior is the individual’s decision.
People’s needs, desires and goals differ.

People make behavior decisions based on their perceptions of
outcomes.
Expectancy Theory – Three Variables
All three variables must be met in Vroom’s formula for
motivation to take place:
Expectancy refers to the person’s perception of his/her ability
(probability) to accomplish an objective – self-efficacy.
Instrumentality refers to belief that the performance will result
in getting the reward.
Valence refers to the value a person places on the outcome or
reward.
3 - ‹#›
classroom use.
Motivating With Expectancy Theory
These conditions result in motivation:

Clearly defined objectives and the performance needed to
achieve them,
Tie performance to rewards,
Be sure rewards are of value to employees,
Make sure employees believe you will do what you say you will
do, and
Use the Pygmalion effect to increase expectations.
3 - ‹#›
classroom use.
Goal-Setting Theory
Goal-setting theory proposes that specific, difficult goals
motivate people.
Writing objectives model are
(1) To + (2) action verb + (3) singular, specific, and
measurable result to be achieved + (4) target date.
Goal setting might be the most effective management tool
available.
3 - ‹#›
classroom use.
Writing Effective Objectives Model
Model 3.1
Model 3.1

classroom use.
3 - ‹#›
Criteria for Objectives
Effective objectives meet these four criteria:
Singular result,
Each objective should have only one end result,
Specific,
The objective should state exact expectations,
Measurable,
Must be observable and measurable, and
Target date,
A specific date set for accomplishing the objective.
3 - ‹#›
classroom use.
Criteria Continued
In addition to the four criteria from the model, there are three
other criteria that do not always fit within the model.
Difficult but achievable – should be challenging.
Participatively set – people who help set their objectives
outperform those who don’t – gains commitment.
Commitment – for objectives to be met, employees must accept
them – participating helps.

3 - ‹#›
classroom use.
Discussion Question
Which of the three process motivation theories do you prefer?
Why?
3 - ‹#›
classroom use.
Components of Reinforcement
Exhibit 3.10
B. F. Skinner believed managers needed to understand the
relationship between behaviors and their consequences, and then
arrange contingencies that reinforce desirable behaviors and
discourage undesirable behaviors.
Exhibit 3.10
classroom use.
3 - ‹#›

Reinforcement theory proposes that through the consequences
for behavior, people will be motivated to behave in
predetermined ways.
Uses behavior modification and operant conditioning.
Two important concepts used to modify behavior are the types
of reinforcement and the schedules of reinforcement.
3 - ‹#›
classroom use.
Types of Reinforcement
Positive reinforcement:
Offer attractive consequences.
Avoidance reinforcement:
Also called negative reinforcement,
Employee avoids negative consequence.
Extinction:
Withhold reinforcement when behavior occurs.
Punishment:
Undesirable consequence.
3 - ‹#›
classroom use.
Types of Reinforcement

Exhibit 3.11
Exhibit 3.11
classroom use.
3 - ‹#›
Schedules of Reinforcement
Continuous reinforcement:
Every desired behavior is reinforced.
Intermittent reinforcement:
When based on time – interval schedule,
When based on output – ratio schedule.
Fixed interval – consistent schedule of pay, etc.
Variable interval – praise now and then.
Fixed ratio schedule – scheduled bonus.
Variable ratio schedule – praise for excellent work.
3 - ‹#›
classroom use.
Motivating with Reinforcement
You get what you reinforce.
General guidelines for using reinforcement:
Set clear objectives,
Select appropriate reinforcement,

Select appropriate reinforcement schedule,
Do not reward mediocre or poor work,
Look for positives and give praise,
Give sincere praise every day, and
Do things for your employees, instead of to them.
3 - ‹#›
classroom use.
Changing Behavior
Tips on using reinforcement:
Use goal-setting theory to set objectives, and
Set specifics for your plan.
Develop your plan by:
Reducing other life stress,
Plan to avoid deviance from your plan,
Expect setbacks,
Plan your reinforcement – have punishments for undesirable
behavior.
3 - ‹#›
classroom use.
Giving Praise
Giving praise creates a win-win situation.
The steps in the giving praise model are (1) tell the employee
exactly what was done correctly, (2) tell the employee why the

behavior is important, (3) stop for a moment of silence, and (4)
encourage repeat performance.
3 - ‹#›
classroom use.
Giving Praise
Model 3.2
Make eye contact, be specific and descriptive.
State benefits, tell how you feel, be specific and descriptive.
Gives employee a chance to “feel” impact of the praise.
Motivates employee to continue desired behavior.
Model 3.2
classroom use.
3 - ‹#›
Reinforcement theory is unethical because it is used to
manipulate employees.
Do you agree with this statement?

Which type and schedule of reinforcement do you plan to use
most often as a leader?
3 - ‹#›
classroom use.
Loops back because behavior is learned through consequences.
Employee action to satisfy need
Degree to which the need is met
Loops back because meeting needs is ongoing.
3 - ‹#›
classroom use.
Need
Motive
Behavior
Consequence

Satisfaction
Putting Motivation Theories Together
Motivation helps explain why employees behave the way they
do.
The groups of theories are complementary.
Each group of theories refers to a different stage in the
motivation process.
Each group of theories answers a different question.
3 - ‹#›
classroom use.
Questions Answered by Theory Group

3 - ‹#›
classroom use.
What needs do employees have that should be met on the job?
How do employees choose behavior to fulfill their needs?
What can mangers do to get employees to behave in ways that
meet the organizational objectives?
Key Terms
acquired needs theory

content motivation theories
equity theory
expectancy theory
giving praise model
goal-setting theory
hierarchy of needs theory
leadership grid
leadership style
motivation
motivation process
Ohio State University leadership model
process motivation theories
reinforcement theory
two-factor theory
University of Michigan leadership model
writing objectives model
3 - ‹#›
classroom use.
58
Chapter 3 Notes
Leadership Behavior:
· By the late 1940’s leadership research had shifted from trait
theory paradigm to behavioral theory paradigm.
· Focusing on what the leader says and does.
· Researchers attempted to identify behavior of effective
leaders.

· Behavioral leadership theory made major contributions to
leadership research.
· But it found there is no ‘one’ best style of leadership.
Leadership Behavior is Based on Traits:
· Leaders’ behavior is based on their traits and skills.
· Directly affecting their behavior and relationship with
employees.
· Leading by example is important.
· Behavior is easier to learn and change than traits.
Leadership Style:
· Leadership style is the combination of traits, skills, and
behaviors leaders use as they interact with followers.
· While based on traits and skills, the important component of a
leadership style is behavior.
· Consistent patterns of behavior characterize a leader.
Autocratic leadership style
· The autocrat makes the decisions, tells employees what to do
and closely supervises workers.
Democratic leadership style
· The democrat encourages participation in decisions, allows the
group to determine tasks and does not closely supervise
employees.
University of Michigan Leadership Model:
· Created and used the Survey of Organizations.
· The University of Michigan Leadership Model thus identifies
two leadership styles: job-centered and employee-

centered.
· Job-Centered Leadership Style has scales measuring goal
emphasis and work facilitation.
· Employee-Centered Leadership Style has scales measuring
supportive leadership and interaction facilitation. [Being In
Between.]
High-High Leader Research:
· The high-high leader has concern for both production and
people, or
· Team leadership style.
· There is some support for the high-high leader style as the
universal theory.
· However, it is not accepted as the one best style in all
situations.
Leadership and Motivation Theories:
· Motivation is anything that affects behavior in pursuing a
certain outcome.
· Through the motivation process, people go from need to
motive to behavior to consequence to satisfaction or
dissatisfaction. [Ups and Downs.]
Content Motivation Theories:
· Content motivation theories focus on explaining and
predicting behavior based on people’s needs. Includes:
· Hierarchy of Needs Theory,
· Two-Factor Theory, and
· Acquired Needs Theory.
· The key to successful leadership is to meet the needs of
employees while achieving organizational objectives.
Hierarchy of Needs Theory:
· In the 1940’s, Abraham Maslow (We will need to use his name
in the dissuasions and his thoughts.) developed his hierarchy of
needs theory based on these four assumptions.

1. Only unmet needs motivate.
2. People’s needs are arranged in order of importance
(hierarchy) from basic to complex.
3. No motivation to fulfill a higher-level need unless the lower-
level need(s) are met.
4. People have five classifications of needs.
Hierarchy of Needs:
· The hierarchy of needs theory proposes that people are
motivated through five levels of needs.
1. Physiological needs – basic needs.
2. Safety needs – safety and security.
3. Belongingness needs – also called social needs.
4. Esteem needs – focuses on ego, status, self-respect.
5. Self-actualization needs – reach one’s full potential.
· Today, Maslow and others realize needs are not on a simple
five-step hierarchy.
Maintenance and Motivators:
Maintenance factors:
· Also called extrinsic motivators.
· Extrinsic motivators include:
Pay,
Job security,
Working conditions,
Fringe benefits, and
Relationships.
Motivators:
· Also called intrinsic motivators.
· Intrinsic motivators include:
Achievement,
Recognition,

Challenge, and
Advancement.
· Better motivators than extrinsic factors.
Motivating Employees with Two-Factor Theory:
· Money as a motivator:
· Money will not necessarily motivate employees to work
harder.
· Motivating with the Two-Factor Theory:
· Under the new paradigm, pay is important, but the best
motivators are intrinsic motivators.
· Herzberg developed job enrichment, the process of building
motivators into the job.
Acquired Needs Theory:
· Acquired needs theory proposes that people are motivated by
their need for achievement, power, and affiliation.
Balancing Work-Life Needs:
· Work-life balance is also called work-home and work-family
balance.
· Life needs a healthy balance.
· The global marketplace allows for around the clock work
causing work-life conflict.
· Two things organizations are doing:
· Providing on-site day care centers, and
· Offering flextime.
· Blue-Collar: No education, skilled trade, and labor.
· White-Collar: Education, Salary, Marketing, Lawyer, and
Professors.
Equity Theory:
· Equity theory proposes that people are motivated when their

perceived inputs equal outputs.
· People compare their inputs and outputs to that of relevant
others and conclude if they are under-rewarded, over-rewarded,
or equitably rewarded.
· When inequity is perceived, employees attempt to correct the
balance.
Motivating with Equity Theory:
· When employees feel under-rewarded, they are demotivated.
Expectancy Theory:
· Expectancy theory proposes that people are motivated when
they believe they can accomplish the task, they will get the
reward, and the rewards for doing the task are worth the effort.
Motivating with Expectancy Theory:
· These conditions result in motivation:
· Clearly defined objectives and the performance needed to
achieve them,
· Tie performance to rewards,
· Be sure rewards are of value to employees,
· Make sure employees believe you will do what you say you
will do, and
· Use the Pygmalion effect to increase expectations.
Goal-Setting Theory:
· Goal-setting theory proposes that specific, difficult goals
motivate people.
· Writing objectives model are
(1) To + (2) action verb + (3) singular, specific, and
measurable result to be achieved + (4) target date.
· Goal setting might be the most effective management tool
available.
An example of mine, based on that formula above:
My aim to graduate by the fall semester in 2019, by the next
semester with honorary certificate.

Giving Praise: (Important to him. Yet not for the class purpose)
· Giving praise creates a win-win situation.
· The steps in the giving praise model are (1) tell the employee
exactly what was done correctly, (2) tell the employee why the
behavior is important, (3) stop for a moment of silence, and (4)
encourage repeat performance.
Running Head: LEADERSHIP
1
Motivational Theories 2
Name: Abdulaziz
Date: 05/14/2019
A leader appreciates the fact that their most important asset is
the human resource they manage. Such a leader acknowledges
that the failure or success of the organization is dependent on
how the employees of the organization have been motivated.
Modern leadership theories incorporate the element of employee
motivation and empowerment as critical elements that define
great leadership skills. Consequently, leaders are therefore
mindful that objectives of the organization can be met more
efficiently when they attend to the needs of the employees. The

acquired needs theory is the most preferable content motivation
theory. This is because it proposes that because individuals
have different experiences and preferences they are bound to
have different needs. Therefore, leaders should not use the same
formulae to satisfy the needs of employees because this needs
maybe different (Rudolph, 2016).
Employee motivation can be perceived from different
dimensions. Process motivational theories attempt to perceive
employee motivation from a behavioral and psychological
dimension. The theories seek to explain how the needs of
employees might influence their behavior at work. The most
preferable theory in this category is the equity motivational
theory. The theory proposes that when workers feels their
efforts are not rewarded equitably they become less motivated
and their productivity might be negatively affected (Rudolph,
2016). If a worker feels their efforts is not comparatively equal
to their fellow employees, they will seek to adjust their efforts
upwards or downwards to march the effort of other employees.
As a leader, the theory encourages that employees should be
rewarded based on the effort they put at work. Any deviation
from a reward system that is perceived to be equitable can
create disharmony among employees making them feel less
motivated.
In any position of power, positive and negative reinforcement
always comes in handy depending on the nature of employees
one is dealing with. The pain, humiliation and public annoyance
that is derived from negative reinforcement might motivate
employees to avoid engaging in actions that not desired at work.
However, it comes with a risk of losing their respect as they
will only fear the consequences of their actions and not
appreciate the importance of following the rules. On the other
hand, a positive reinforcement generates pleasure and a sense of
appreciation by the organization (Temminck, Mearns & Fruhen,
2015). This form of motivation is more beneficial to both
parties and breeds mutual respect. The best model to employ a
mixture of both forms of reinforcement so that you cater to

employees of every kind.
References
Rudolph, C. W. (2016). Lifespan developmental perspectives on
working: A literature review of motivational theories. Work,
Aging and Retirement, 2(2), 130-158.
Temminck, E., Mearns, K., & Fruhen, L. (2015). Motivating
employees towards sustainable behaviour. Business Strategy
and the Environment, 24(6), 402-412.

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