Financial Management

Topics: Stock, Stock market, Rate of return Pages: 5 (1201 words) Published: February 18, 2013
Question 1)

1) Discuss puzzles and anomalies
2) Discuss three forms of market efficiency
   Marketefficiency is a measure of the availability(to all participants ina market) of the information that provides maximum opportunities tobuyers and sellers to effect transactions with minimum transactioncosts.

Types of Efficiency:
Operational efficiency:  It refers to thecost to buyers and sellers of transactions in securities on theexchange. This may be promoted by creating as much competitionbetween market makers and brokers as possible, so that they earnonly normal profits and not excessively high profits. Allocation efficiency: Our society has ascarcity of resources and it is important that we find mechanisms,which allocate those resources to where they can be mostproductive. Stock markets help in the process of allocatingsociety’s resources between competing real investments. Pricing efficiency:  It is a degree towhich the prices of assets reflect the available market placeinformation.

3 Forms of Market Efficiency:
(1) Weak Efficiency:  Weak efficiencymeans that the price of the securities fully                                        reflect price and trading history. (2) Semi Strong Efficiency: Semi StrongEfficiency means that the price of securities                                                   Fully reflects all public information, including historical                                               Price and trading patterns. (3) Strong Efficiency: It means that theprices of securities reflect all information regardless of whetheror not it is publicly available, including historical price andtrading patterns.

Question 2)
1) Discuss the implications of the seperation of ownership and management Professional Managerial Skills
* The growth of a company comes with the demand for different skills to manage the operations of the company, meaning that the owners of a company may not entirely have the necessary skills and experience needed for certain managerial roles. Creating a management team separate from the ownership enables the company to be run by professionals who have diverse skills such as in marketing, corporate financing, public relations, among others. Ease Performance Appraisals

* Performance appraisals are an essential part of good corporate governance as they enable managers to evaluate the company and to point out areas of improvement. It can be complex to evaluate performance where there is a lack of separation of ownership and management. But separation makes it easier for the board and those in management to be evaluated objectively. Owners are able to freely deal with the chief executive officer and other senior managers, even after the appraisals. Capital Utilization

* Capital utilization involves the arrangements that determine the way in which resources and assets are managed in a company. Separating personal assets and liabilities from the business assets and liabilities may prove to be difficult for company owners. Managers come in to devise ways in which business assets are managed to generate the highest profits for the all shareholders. Checks and Balances

* Separation of managers from owners in a firm ensures that a system of corporate checks and balances is in place. Managers act as a buffer between the company and stakeholders such that they can alleviate negative impacts of stakeholder activities and avoid hitches in public relations. Managers are well suited to put in place strategies that will lessen losses to the rest of the stakeholders as a result of the actions of another stakeholder.

2) Discuss the agency problem and how to fix that
An "agency problem" is a conflict of interest arising between creditors, shareholders, and management because of differing goals. 

For example, an agency problem exists when management and stockholders have conflicting ideas on how the company should be run. 

The two most common agency problems are...
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