...Chapter 1,2,3 – Answers to Assigned End of the Chapter Questions 1-1. Shareholder (owner) wealth maximization is the most widely cited business goal. The justification for shareholder wealth maximization is that managers are hired by the owners (shareholders) and serve as their agents. In addition, the well-being of the managers is closely tied to the wealth of the shareholders. In perfect competition, shareholder wealth maximizing behavior is necessary just to survive. 1-2. a. Wealth maximization for a single-period decision is measured by economic profit which is the excess of earnings or cash flow over that which could have been earned on investments of similar risk. b. Wealth maximization for a multi-period decision is measured by discounting the expected future economic profits (which is the excess of earnings or cash flow for each period over that which could have been earned on investments of similar risk for that period) back to present. 1-4. Present value is either a single future amount discounted back to present or the sum of a number of future amounts discounted back to present. Net present value is the sum of the present value and the initial outlay or outlays necessary to produce the future amount(s). 1-5. A capital investment is an outlay that is expected to result in benefits extending more than one year into the future. Capital budgeting is the process of selecting capital investments. 1-6. Steps in capital budgeting process: ...
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...against others. Scarcity can also be broken down to four key ingredients: land, labor, capital and enterprise. In an influential 1932 essay, Lionel Robbins defined economics as "the science which studies human behavior as a relationship between ends and scarce means which have alternative uses." Opportunity cost or economic opportunity loss is the treasured of an adjoining different of a foregone result in making a decision. Opportunity cost also analysis the considerable part of a company's in decision-making processes, but is not treated as an absolute cost in any financial statement. The upcoming best concern that a person can engage in is referred to as the opportunity cost of doing the finest being and ignoring the next prime thing to be done. Economic opportunity cost the basic problems in society. Therefore it focuses on the differences between human resources and natural environment. The basic scarcity could be an understanding in a confirming life, good life, and hope for a better one. After knowing what scarcity and opportunity cost, or economic opportunity loss, it made it easier for me to summarize the story of the concepts. The story “The Wealth of People,” helped me compare the definitions of the two concepts I chose and helped me explain how I would use this information in teaching an appropriate age group. For example, using the information...
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...| The Wealth Divide Continues | American Government | | Charles Hatley | HCC Sienna | Fall Semester | The United States of America is supposed to be a nation where everyone is created equal. A nation where everyone is supposed to have an equal chance. But looking at the huge gap between the wealth divide of our nation and the many problems it creates you would think otherwise. The rich continue to get richer and the poor get poorer while the government makes it even harder for the middle and lower class to stay out of poverty. Lack of affordable public housing and also lack of middle income housing are a few of the problems. The Gap in the wealth divide along with these two problems makes life very difficult for middle class and lower class to survive during these hard economic times. “Affordable housing is a term used to describe dwelling units whose total housing costs are deemed "affordable" to those that have a median income. Although the term is often applied to rental housing that is within the financial means of those in the lower income ranges of a geographical area, the concept is applicable to both renters and purchasers in all income ranges.” (Wikipedia) In The United States and Canada the accepted guideline for being able to afford a house is a cost that does not go over 30% of a household’s gross income. The costs include taxes, insurance and utility costs...
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...To what extent is it true that as a result of agency costs shareholders wealth will not be maximized by corporate management. If so, what actions can shareholders take to correct the situation? As we know that agency costs exists in most corporations since the separation of ownership and management in large businesses. Shareholders are the principals and owners; managers are the stockholders’ agents. The problem is to get between shareholders and managers since they have different objectives. Shareholders’ goals are maximizing firms’ value, managers’ goals are benefit themselves, thus the conflicts rise in the company. In this report through concept of agency costs and analysis that two questions will be discussed. First, to what extent that as a result of agency costs shareholders wealth will not be maximized by corporate management. I will talk the agency costs in the conflict of interest between shareholders and management through analysis and lots of examples. Second I will discuss the actions that shareholders take to reduce the agency costs, and achieve their wealth maximizing. According to Hickman (1996), there are always separation of ownership and management in large businesses. Major corporations may have a large number of shareholder, these shareholders have no way to be actively involved in management so that they hire professional managers to manage the corporations. Shareholders put their money in corporations because they hope...
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...2. What are the differences between shareholder wealth maximization and profit maximization? If a firm chooses to pursue the objective of shareholder wealth maximization, does this preclude the use of profit maximization decision-making rules? Explain. The profits maximization refers to how much dollar profit the company make. Unlike the profits maximization, the definition of shareholder wealth maximization states that management should seek to maximize the present value of the expected future returns to the owners of the firm. I think the shareholder wealth maximization can include the profit- maximization model, it consider more than profit maximization model, for example, the shareholder wealth maximization mode consider the timing of return and the risk of the company, it will also consider the profit the company can make. So that we should use the shareholder maximization model for company’s decision making. 6. Explain why management may tend to pursue goals other than shareholder wealth maximization. There are some reasons for the company not use the shareholder wealth maximization for the decision making. First, the shareholder wealth maximization is a long-term goal, it need time to considering, if a company must use a short time to do the decision making, it may not use the shareholder wealth maximization model. Second, if the manager just want to maximize their own bonuses, they normally consider things based on short term goals which may not be to...
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...Agency Costs and Ownership Structure Michael C. Jensen Harvard Business School MJensen@hbs.edu And William H. Meckling University of Rochester Abstract This paper integrates elements from the theory of agency, the theory of property rights and the theory of finance to develop a theory of the ownership structure of the firm. We define the concept of agency costs, show its relationship to the ‘separation and control’ issue, investigate the nature of the agency costs generated by the existence of debt and outside equity, demonstrate who bears costs and why, and investigate the Pareto optimality of their existence. We also provide a new definition of the firm, and show how our analysis of the factors influencing the creation and issuance of debt and equity claims is a special case of the supply side of the completeness of markets problem. The directors of such [joint-stock] companies, however, being the managers rather of other people’s money than of their own, it cannot well be expected, that they should watch over it with the same anxious vigilance with which the partners in a private copartnery frequently watch over their own. Like the stewards of a rich man, they are apt to consider attention to small matters as not for their master’s honour, and very easily give themselves a dispensation from having it. Negligence and profusion, therefore, must always prevail, more or less, in the management of the affairs of such a company. — Adam Smith (1776) Keywords: Agency costs and theory...
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...CHAPTER ONE INTRODUCTION 1. Background to the Study Corporate Kenya is shifting its capital raising gear from corporate bonds to the issuance of rights in an effort to raise funds for growth, working capital and new investment while at the same time reigning in the cost of accessing such funds. A rights issue is an option that a company opts for to raise capital under a seasoned equity offering of shares to raise money. McClure (2005) defines a right issue as an invitation to existing shareholders to purchase additional new shares in the company. With the issued rights, existing shareholders have the privilege to buy a specified number of new shares from the firm at a specified price within a specified time. A shareholder is an individual or institution (including a corporation) that owns one or more shares of stock in a public or private corporation. Fama (1980) observes that shareholders own stock, but not the corporation. Shareholders wealth is basically the wealth shareholders get to accrue from their ownership of shares in a firm. Shareholders wealth increases either by increase in share prices that bring about capital gain or increase in dividend payments. Ng’ang’a (1999) argues that the expectation of shareholders will push the management to maximize their returns and increase the market value of the firms. There are two types of rights issue namely the public issue and privileged/private issue. The rights issue gives the existing shareholders securities...
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...of Glasgow at the tender age of 14. Adam published An Inquiry into the Nature and Causes of the Wealth of Nations in 1976, this publication is responsible for the opinionated economy that launched the beginning or the Industrial Revolution, and measured to be the primary works of contemporary economics. It is known as the first comprehensive defence of free market policies and it is divided into five books between two volumes (Martin, 2012). Adam saw the concept of value as the merely the universal, as the only precise calculation of value. Adam had two situations of that speculation Value and worth of merchandise is resolute by work spent on it. Cost, it is work that becomes visible in the product. Cost and worth is fabricated from the cost of manufacture goods. Basically, from labor cost, revenue and lease for property. Adam argued two conditions, one for primitive society, and the other for realistic situation in a modern capitalistic world. While discussing the provisions of the labor theory of value, lacking several significant adjectives it must hypothetically submit to the quantity of work essential to the creation of a profitable product, counting the labor essential to the progress of any genuine wealth engaged in creation. Both David Ricardo and Karl Marx tried measuring and personifying the work mechanism to categorize and set the authentic cost, or normal price of goods. The work assumption of value, obtainable by Adam Smith, nevertheless...
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...Wealth Management verses Profit Management : To begin with , Profit management is all about maximizing profit and wealth management is all about increasing the worth of the equity or value of the company . Profit Management : Profit management is maximizing profit . It comes as a part of Profit and Loss Account . The main things to be considered in profit managemnet , is generating maximum revenue with the minimum cost invonved . WIthin profit management , the focus is mainly on operations management . The product to be manufactured / sold etc are already determined . The essence is to use the best techniques within the sector to reduce the production cost . So for similar product if another company takes X amount to make Y units , the goal would be try and make Y units with much less amount than X . So better skilled work force , best available technology usage are some ways to improve on the cost of making . Revenue generation has the sell part to it too. So if we are able to maximize sales , we are adding to profit - provided we are not selling at a loss - like e commerce sites are doing . So concepts like right advertising , CRM , using the parent brand name in innovative ways , come into play . To sum it up , profit management is about maximizing revenue , with as less production cost possible . Wealth Management : Wealth management is all about the brand equity value of the compnay and for a equity holder return on investment. What would be term as...
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...Love 4-06-09 Advance Cost Utilizing Capabilities to Increase Stakeholder Wealth: A Balance Scorecard Approach Every for-profit company wants to be at the top of the food chain when it comes to financial wealth and goals. To increase company wealth a firm must balance their scorecard which consists of four key perspectives: financial, internal, customers, and future. I chose this article for my paper because one of my goals in life is to be at the top of the pyramid at a for-profit company. Some of the tools that are mentioned in this article will help me build my foundation on to achieve my goals of reaching top management at a for-profit company. Brief Overview The article discusses how for-profit companies can build and increase their wealth from an internal and external standpoint. The article also addresses how resources are accessed, developed, combined and/or deployed which leads to wealth creation. Taking a balance scorecard approach is one way a company can determine how capabilities can lead to wealth creation. The balance scorecard approach consists of the following perspectives: financial, internal, customers, and the future. The article also proposed a modified balance scorecard which consists of shareholders, customers, employee, and future positioning perspective. The financial perspective is concerned with risk and profit from a shareholder point of view. Public firms are in business to create and increase shareholders wealth. If a firm is not profitable...
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...Agency Costs and Ownership Structure Michael C. Jensen Harvard Business School MJensen@hbs.edu And William H. Meckling University of Rochester Abstract This paper integrates elements from the theory of agency, the theory of property rights and the theory of finance to develop a theory of the ownership structure of the firm. We define the concept of agency costs, show its relationship to the ‘separation and control’ issue, investigate the nature of the agency costs generated by the existence of debt and outside equity, demonstrate who bears costs and why, and investigate the Pareto optimality of their existence. We also provide a new definition of the firm, and show how our analysis of the factors influencing the creation and issuance of debt and equity claims is a special case of the supply side of the completeness of markets problem. The directors of such [joint-stock] companies, however, being the managers rather of other people’s money than of their own, it cannot well be expected, that they should watch over it with the same anxious vigilance with which the partners in a private copartnery frequently watch over their own. Like the stewards of a rich man, they are apt to consider attention to small matters as not for their master’s honour, and very easily give themselves a dispensation from having it. Negligence and profusion, therefore, must always prevail, more or less, in the management of the affairs of such a company. — Adam Smith (1776) Keywords: Agency costs and theory...
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...Journal of Financial Economics 3 (1976) 305-360. Q North-Holland Publishing Company THEORY OF THE FIRM: MANAGERIAL BEHAVIOR, AGENCY COSTS AND OWNERSHIP STRUCTURE Michael C. JENSEN and William H. MECKLING* University of Rochester, Rochester, NY 14627, U.S.A. Received January 1976, revised version received July 1976 This paper integrates elements from the theory of agency. the theory of property rights and the theory of finance to develop a theory of the ownership structure of the firm. We define the concept of agency costs, show its relationship to the ‘separation and control’ issue, investigate the nature of the agency costs generated by the existence of debt and outside equity, demonstrate who bears these costs and why, and investigate the Pareto optirnality of their existence. We also provide a new definition of the firm, and show how our analysis of the factors influencing tht- creation and issuance of debt and equity claims is a special case of the supply side of the completeness of markets problem. The directors of such [joint-stock] companies, however, being the managers rather of other people’s money than of their own, it cannot well be expected, that they should watch over it with the same anxious vigilance with which the partners in a private copartnery frcqucntly watch over their own. Like the stewards of a rich man, they are apt to consider attention to small matters as not for their master’s honour, and very easily give thcmsclvcs a dispensation from...
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..."Impact of Government Regulation" Please respond to the following: •* From the scenario for Katrina’s Candies, take a position as to whether government regulation is constraining or enabling in this situation, as it relates to the operational efficiency of the company. Speculate on the fundamental manner in which government regulation could impact the shareholders’ wealth and profitability. Considering the scenario for Katrina’s Candies, I believe the government regulation is enabling in this situation, as it relates to the operational efficiency of the company. The government’s intervention in the US market place process is to; provide for a market that is competitive by keeping monopolistic and other anti-competitive tactics at bay, protect the public interest and enable and encourage innovation. These are accomplished through the antitrust regulation statues and their enforcement which prohibits monopolies as stated in the Sherman Act, 1890 (McGuigan et al., 2014). The presence of anticompetitive business practices of collisional price fixing, wholesale price discrimination, exclusive dealing and tying contracts, anti-merger regulations, and interlocking directorates are specified in the Clayton Act, 1914. The Federal Trade Commission is the nation’s consumer protection agency that works for the consumer to prevent fraud, deception and unfair business practices in the marketplace. Government policies are there to ensure that products are available to the consumer at lower...
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...What is Shareholders’ Wealth Maximization? Shareholders are individuals who own a share of a firm or an organization by buying stocks of that organization and as a result they are entitled of any financial profit made by any economic activity that generates those profits. Shareholders Wealth Maximization is a modern approach adopted by financial management that aims to increase the wealth of shareholders in a long term process rather than making short term profits. This objective can be achieved by maintaining a relatively high stock market price of the company which will reflect the wealth of its shareholders and affect the company’s behaviors in regards to decision making. As the stock price increases, the wealth of those who hold the stock increases as well and the net value of the company increases as a result. This decision making process takes into consideration any risk factors that might compromise the main objective and for this reason the financial manager must be aware and in full knowledge about the parameters that could affect the stock price. What is profit maximization? Profit maximization is basically the process of identifying the most efficient manners in which the highest net income, or profit, with the resources and market share in hands can be obtained. The major difference between profit maximization and shareholders’ wealth maximization is that the former focuses on relatively high gains in short periods of time that can be gained through, for example;...
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...HOW TOTAL WEALTH OF THE CEO AFFECTS THE RISK POLICY OF FIRM OLD DOMINION UNIVERSITY FIN 863 FINAL PROJECT BY SONIK MANDAL CHARLIE SWARTZ INTRODUCTION Agency theory states that the goals of the owners and the managers of a firm diverge in a way that the managers take less risk since their ownership of the company is much less compared to the owners of the firm who have a much bigger stake in the company. Thus managers being risk averse, they forego profitable ventures if they anticipate them to be risky (Guay, 1999, Jensen & Meckling, 1976). Making the salary structure more convex by introducing more option-based compensation and stock awards is one way owners try to align the goals of the managers with the owners. But managerial wealth attached to the firm is only a fraction of their total personal wealth in the portfolio. Other components of manager’s total wealth could be stocks owned in other companies, real estate portfolio, and other debt related securities. A lot of research has been done in the past explaining how managerial compensation structure (options, stock awards etc.) affect his risk taking abilities (Knopf et al. 2002, Rogers, 2002, etc.). But not much research has been done showing how manager’s outside wealth affects his risk taking in the firm. As far as we know, the only paper that has looked at this relationship is by Elsila et al. 2013 but that paper only looked at the Swedish listed firms...
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