Managerial Finance
ASSIGNMENT
BMMF5103
MANAGERIAL FINANCE
15 July 2013
QUESTION 1
a) Maximizing shareholder wealth is a “moral imperative” for financial manager means managers are supposed to work for shareholders who are the actual owners of a company or corporation. Shareholders elect company directors who in turn hire managers to run the company on day to day basis with the view to make profit for the company. Managers are paid for their services rendered to the company whereas the shareholders own the company. As such morally managers should pursue policies that enhance shareholder value with the primary objective focused on stockholder wealth maximization.
b) Managers make key day-to-day decisions to maximize shareholder value. But how do the owners of a business know that managers are operating to maximize shareholder value? This lack of information is known as the principal-agent problems. The agent performs the tasks on shareholders’ behalf yet the shareholders cannot ensure that the agent performs precisely the way the shareholders would like.
Agency costs as related to a corporation refers to the costs of preventing agents (e.g. managers) pursuing their own interests at the expense of shareholders. There might be conflicts between shareholders and the company managers. Shareholders who are owners want the managers to make decisions which will increase the share value. Managers who receive salaries prefer to expand the business with the view to increase their salaries which may not necessarily increase the share value. Thus, agency costs tend to decrease the value of a corporation because the rising costs make the share price low when there is substantial debt involved. Costs of monitoring will increase and thus reduce wealth maximization of shareholders.
c) Business ethics is the acceptable set of moral values and corporate standards of conduct in running a business organization. It includes proper business
BMMF5103
MANAGERIAL FINANCE
15 July 2013
QUESTION 1
a) Maximizing shareholder wealth is a “moral imperative” for financial manager means managers are supposed to work for shareholders who are the actual owners of a company or corporation. Shareholders elect company directors who in turn hire managers to run the company on day to day basis with the view to make profit for the company. Managers are paid for their services rendered to the company whereas the shareholders own the company. As such morally managers should pursue policies that enhance shareholder value with the primary objective focused on stockholder wealth maximization.
b) Managers make key day-to-day decisions to maximize shareholder value. But how do the owners of a business know that managers are operating to maximize shareholder value? This lack of information is known as the principal-agent problems. The agent performs the tasks on shareholders’ behalf yet the shareholders cannot ensure that the agent performs precisely the way the shareholders would like.
Agency costs as related to a corporation refers to the costs of preventing agents (e.g. managers) pursuing their own interests at the expense of shareholders. There might be conflicts between shareholders and the company managers. Shareholders who are owners want the managers to make decisions which will increase the share value. Managers who receive salaries prefer to expand the business with the view to increase their salaries which may not necessarily increase the share value. Thus, agency costs tend to decrease the value of a corporation because the rising costs make the share price low when there is substantial debt involved. Costs of monitoring will increase and thus reduce wealth maximization of shareholders.
c) Business ethics is the acceptable set of moral values and corporate standards of conduct in running a business organization. It includes proper business