Question

Please answer the following questions based on your own understandings: (1) How many types of decisions one corporation needs to make? Could you please show two examples for each type? (2) What are the functions of financial managers? Ideally, could one person both be a controller and a treasurer? Why? (3) What is agency cost? How could we reduce this cost? Please show at least two ways and illustrate how they work in detail. (4) What is the goal of the corporation? Is it desirable for managers to act in the narrow, selfish interest of their shareholders? Essay Toolbar navigation B I U Ꭶ 를 들 들 A A

Answer 1

1. There are usually three types of decisions a Corporation generally will make and they are as understated- A. Financing decision: These are the decision which are related to financing of the business and These will be related to Capital structuring decisions and debt financing and equity financing and all such decisions which are related to financing of various projects. Ex: Financing of a mutually exclusive project, Financing for Acquisition of long-term asset. B. Investment decision: These are the decision which are related to whether to invest or not to invest into some specific asset, which will be having benefits for the company for shorter and longer period of time and these decisions will be made after various types of capital budgeting analysis which will be including net present value and internal rate ofreturn. Ex: Acquisition of Land and Acquisition of Machinery. C. Dividend decisions: These are the decisions which are related to whether to pay the dividendor invest the profits back into the business so these are the decisions which are related to payment of dividend for the company. Ex: Payment of dividend to the shareholders or reinvestment of profits back into the various projects to earn higher rate of interest.

2. Financial managers perform data analysis and advise senior managers on profit-maximizing ideas. Financial managers are responsible for the financial health of an organization. They produce financial reports, direct investment activities, and develop strategies and plans for the long-term financial goals of their organization. Financial managers typically: i. Prepare financial statements, business activity reports, and forecasts, ii. Monitor financial details to ensure that legal requirements are met, iii. Supervise employees who do financial reporting and budgeting, iv. Review company financial reports and seek ways to reduce costs, v. Analyze market trends to find opportunities for expansion or for acquiring other companies, vi. Help management make financial decisions Every company does not have a treasurer and controller. Generally, the controller and corporate treasurer functions are differentiated only in larger organizations, although both of them generally report to the chief financial officer.

3. An agency cost is a type of internal company expense which comes from the actions of an agent acting on behalf of a principal. Agency costs typically arise in the wake of core inefficiencies, dissatisfactions and disruptions, such as conflicts of interest between shareholders and management. Payment of the agency cost is to the acting agent. Reduction in cost: These costs mainly refer to economic incentives such as performance bonuses, stock options and other carrots which would stimulate agents to execute their duties properly. The agent's purpose is to help a company thrive, thereby aligning the interests of all stakeholders.cost could be reduced by not paying dividends to shareholders etc 1. Incentivizing Employees: If agents are acting in accordance with their own interests, changing incentives to redirect these interests may be beneficial for principals. For example, establishing incentives for achieving sales quotas may result in more salespeople reaching daily sales goals. If the only incentive available to salespeople is hourly pay, employees may have an incentive for discouraging sales. Creating incentives that encourage hard work on projects benefiting the company generally encourages more employees to act in the business's best interest. By aligning agent and principal goals, agency theory attempts to bridge the divide between employees and employers created by the principal-agent problem. 2. Economic Calculation and Competition: Ultimately, individual corporate management is disciplined by other competitive managers. All management competes for shareholder equity, and shareholders who feel the loss of mismanagement have an incentive to switch ownership toward better management. Agency theory has only recently come to recognize the role of dynamic capital and money markets in solving agency problems. Inefficiencies in corporate operations create a form of arbitrage opportunity for entrepreneurs, through reputation-creating organizations or takeovers, to move capital toward better management.

4. The primary goal of corporations and businesses is to generate profits. Increasingly, corporate executives and business owners are identifying ways in which their philanthropic contributions can help them meet financial goals. It is not desirable for managers to work in a narrow manner he should make all the stakeholders happy including employees, creditors, suppliers, agents therefore management should work on holistic management.

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