corporate finance, funds statament,agency problem 52
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8/8/2019 Corporate Finance, Funds Statament,Agency Problem 52
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Hi!!!! I am a
financeman!!!
What this man does???
FINANCEMANAGER
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31-03-2002 31-03-2003 31-07-2002 31-03-2003
3589.816 3577.043
343.379 305.879 1338.768 1522.166
5525.162 4922.769 2251.048 2054.8775868.541 5228.648 620.517 1019.248
2871.565 3074.125
212.891 285.119
2012.431 2317.769
594.333 833.333
122.000 238.800
152.079 545.441 28.862 28.098
868.412 1617.574 275.862 336.930
127.069 152.137
28.290 7.383 483.668 359.037
10.476 88.239 4.998 7.228
316.512 322.492 2.039 1.212
355.278 418.114 4.323 4.635
926.821 889.277
1254.779 594.979
376.834 290.362 1.237 1.132
290.094 278.168 55.119 91.974
666.928 568.530 1.225 3.325
265.888 112.596 57.581 96.431
1114.761 1243.934
3353.942 2824.621
14.066
8237.938 8230.581 8237.938 8230.581
Fixed Assets (Net)
Packing Material
Provisions
(vi) Loans and Advances
Non-Convertible Debentures
Working Capital Borrowings from Banks
Fixed Deposits
Acceptances (Short-Term)
Deferred Sales Tax Loan
Goods Traded in
Particulars
NET WORTH
Miscellaneous Expenses
Total AssetsTotal Liabilities
Total Current Assets
Semi-Finished Goods
Sundry Creditors
Other Current Liabilities
Finished Goods
Debts Considered Good
Cash in hand
Cash in Fixed Deposits Account
Scrap
Stores, Spares & Consumables
Current Liabilities:
(ii) Sundry Debtors
(iii) Cash and Bank Balnces
Raw Materials
Loans Funds:
Secured Loans
Unsecured Loans
Investments
Current Assets, Loans and Advances:
(i) Inventories
Particulars
Reserves and Surplus
Deferred Tax (Net)
Gross Block
ASSETS
Less: Depreciation
Capital Work-in-ProgressNet Block
FINOLEX Cables LimitedBALANCE SHEET as at 31st March (Rs. in millions)
Foreign Currency Demand Loan (Short-
Term)
Cash in Current Account
LIABILITIESShareholders' Fund:
Share Capital
READ &
THINK!!!
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HAVE YOU EVER WONDEREDHAVE YOU EVER WONDERED
WHAT DECISIONS OF AWHAT DECISIONS OF AFIRM DETERMINEFIRM DETERMINE THETHE
STRUCTURE OF A BALANCE SHEET?STRUCTURE OF A BALANCE SHEET?
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2002 2003
724.460 282.230
221.954 235.245
(70.059) (72.658)
9.056 21.017
(50.741) (50.570)
7.033
103.458 123.446
938.128 54 5.743
340.857 558.581
(120.318) (303.046)
1158.667 801.278
(49.700) (24.500)
1108.967 776.778
70.059 72.658
10.327 44.100
325.405 104.279
(1 064.053) (502.922)
279.805 1.703
(223.467)
(601.924 ) (280.182)
(92.833) 239.00010.476 77.763
(4.957) (20.907)
(37.500)
(712.500)
28.125
4.467 5.981
7.077 6.390
(1 03.458) (1 23.446)
(257.534) (1 03.521 )
(4 36.762) (64 0.615)
70.281 (144 .019)116.167 186.448
186.448 42.429
CASH FLOW STATEMENT OF FINOLEX Cables LIMITED FOR THE YEAR ENDING ON 31ST
MARCH
Adjustments for :
Depreciation (Net)
Income from Investments
A) CASH FLOW FROM OPERATING ACTIVITIESNet Profit/ (Loss) Before Tax and Extraordinary Items
Operating Profit before Working Capital Changes
Adjustments for Changes in Working Capital
Current Assets
Buy-Back of Shares
Taxation
Net Cash Flow from Operating Activities
Current Liabilities
Cash Generated from Operations
Sales of Fixed Assets
Sales of Investments
Amalgamation of Subsidiary
Net Cash used in Investing Activities
Proposed Dividend including tax thereon
Short Term Acceptances
Fixed Deposits
Premium on Buy-back of Shares
Unclaimed Dividend
Interest on Fixed Period Loans
Closing Balance - Cash and Cash Equivalents
Particulars
Loss/ (Profit) on Sale of Fixed Assets
Loss/ (Profit) on Sale of Investments
Amortisation of Miscellaneous Expenditure
Interest on Fixed Period Loans
Net Cash used in Financing Activities
Sales Tax Deferral Loan
Net increase/ (decrease) in Cash and Cash EquivalentsOpening Balance - Cash and Cash Equivalents
(Rs. in mill ions)
Purchase of Fixed Assets
Investments in Subsidiary
Excess appropriation for Dividend written back
C) CASH FLOW FROM FINANCING ACTIVITIES
Debentures (Net of Redemption)
B) CASH FLOW FROM INVESTING ACTIVITIESIncome from Investments
Cash
FlowStatemen
t
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Identify anyfourimportantfinancial decisionsIdentify anyfourimportantfinancial decisions
taken bythe Companyduringtheyear.taken bythe Companyduringtheyear.
1 Buy Back of Shares Issue of Non-Convertible Shares
Payment of dividends
Sale of Investments
Purchase of Fixed Assets
Redemption of Fixed Deposits
Reduction in Net Working Capital
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AnalyzeAnalyze variousvarious consequencesconsequences andand impactsimpacts ofof thethe financialfinancial
decisionsdecisions identifiedidentified aboveabove onon thethe BalanceBalance SheetSheet andand thethe
ProfitProfit andand LossLoss AccountAccount ofof thethe CompanyCompany.. Also,Also, classifyclassify thetheimpactsimpacts specifiedspecified intointo shortshort--termterm onesones andand longlong--termterm onesones..
2 Buy Back of Shares..???
Issue of Non-Convertible Shares ..???
Payment of dividends ..???
Sale of Investments ..???
Purchase of Fixed Assets ..???
Redemption of Fixed Deposits ..???
Reduction in Net Working Capital ..???
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Identify WHO is behindtheimportantdecisionsIdentify WHO is behindtheimportantdecisions
identified above.identified above.
3 ?
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WHO IS RESPONSIBLE TO MAKE DECISIONS
THAT DETERMINE ASSETS SIDE AND THE
LIABILITIES SIDE OF A BALANCE SHEET??
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This man!!!
FINANCEMANAGER
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Identify anytwoimportantfinancial decisionswhichwereIdentify anytwoimportantfinancial decisionswhichwere
taken bythemanagementofthe Companyinpast buttheirtaken bythemanagementofthe Companyinpast buttheir
effectcanstill beseeninthe Balance Sheetoftheyear 2002effectcanstill beseeninthe Balance Sheetoftheyear 2002--03.03.
4 Purchase/creation of Fixed Assets
Raising funds through share capital, long-term loans etc.
Miscellaneous Expenditure
Purchase of investments
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Inyouropinion,whatmust betheobjective(s)Inyouropinion,whatmust betheobjective(s)
behindthefinancial decisionsdiscussed above?behindthefinancial decisionsdiscussed above?
5 Profit Maximization??? Sales Maximization..???
Wealth Maximization ..???
.
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Listdownsomeoftheimportantissues,which,youthink, areListdownsomeoftheimportantissues,which,youthink, are
involved/before,themanagementofthe Company.involved/before,themanagementofthe Company.
6
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PutinsimplewordsPutinsimplewords whatisthe basicfunctionwhatisthe basicfunction
ofa Finance Managerin a businessfirm?ofa Finance Managerin a businessfirm?
7 Manage theBalance Sheet of
the Company.
How should a finance managermanage the Balance Sheet of a
Company is a subject matter of
FINANCIAL MANAGEMENT!!!
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FinancialFinancialManagement...Management...
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FINANCIAL MANAGEMENT???
ThetheoryofFinancial Managementor CorporateFinanceisthe theory of financial decision making by
business firms.
Itcan bedescribed asthestudyofthedecisionsthateveryfirmhastomakerelatedtofinancial matters.
Itisthatmanagerial activitywhichisconcernedwiththeplanning andcontrollingofthefirmsfinancial resources.
It can be viewed as proper management of flowsof funds in a firm.
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ToTo bebe preciseprecise-- thethe mainmain tasktask ofof
FinancialFinancial ManagementManagement isis toto
MANAGEMANAGE FLOWSFLOWS OFOF FUNDS/CASHFUNDS/CASHTHROUGHTHROUGH OUTOUT THETHE
ORGANIZAT
IONORGANIZAT
IONT
OT
O ENHANCEENHANCET
HET
HEVALUEVALUE OFOF AA FIRMFIRM..
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Why Should a studentofmanagementstudyFinancial Management...???
Management Students areinterestedinthesubjectbecause amongthemostcrucial decisionsofa firm arethosewhichrelatetofinance, and anunderstandingofthetheoryoffinancial managementprovidesthemwith
conceptual and analytical insightstomakethosedecisionsskillfully.
They should study Financial Management because it
provides necessary tools to appreciate the financialdimensions of managerial decisions. Its study helps intraining the minds of managers so that they can handleskillfully financial implications of managerial decisions.
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FOCUS/NATURE OF FINANCIAL MANAGEMENT
It focuses basically on corporate that is, thevehicle to achieve objectives of anentity. It isassumed to be Joint Stock Company; and hence, it issometimes is known as CORPORATE FINANCE.
Implicationofitis- all managerial decisionswill be assumedto bemade bytheMANAGEMENTwhichis anagentofshareholders.
It is all-pervasive managerial function in a firm. It
has to be integrated with Production, Marketing andPersonnel functions of the management.
Implicationofitis- financial decision-makingshould beintegratedwithothermanagerial functions.
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FOCUS/NATURE OF FINANCIAL
MANAGEMENT(continued)
It is all decision-making; nothing except
decision-making.
Implicationofitis- onehastomakebest possibledecisions andforthatuse all thatisneeded andthis
makesit a multi-dimensional subject.
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Whatisexpectedfrom a financemanager?
Toprovidenecessaryfundssothatnoproductive and
beneficial activityshould besacrificedforwantoffunds.
Toensurethatscarcefundsofthefirmshould beoptimally
utilised.
Toplan andcontrol in a coordinatedmannersothatthe
requirementsofall thedepartmentscould bemet
effectively.
Donot act as a bull-dog but as a watch-dog.
Donot act as a strictcontroller and auditor but as a
facilitator andmotivator.
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Whatisexpectedfrom a financemanager?(continued)
Donot allowthefundsofa firmtoremainunutilised.
Donot let anyoneinthefirmtowastefunds.
Donot let anyonetocommit anyfraudonfunds.
Donot letthesystemto berigidenoughso astosacrifice
profitable activities/opportunitiesofthefirm.
Act as aneffectivechannel betweenfinancial marketson
oneside andthecompanyontheotherside.
Ensurethatnecessary legal requirements aresatisfiedwhile
taking anyfinancial decision.
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FINANCEFINANCEMANAGERMANAGER
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BasicnatureofFinancial Managementas a
Course of study
Itis a decision-makingcourse that is to say, each topicin it is concerned with a managerial decision problem.
All decision problems dealt in it are having finance(money or funds) as an important dimension.
Its approachtodecision-makingisquantitative innature. Thatstosay,itmakeuseofnumbersheavily.
Itisprimarilynormative innature.
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BasicnatureofFinancial Managementas a Course of
study(continuation)
Tounderstanditproperly,oneshould becomfortablewiththefollowing:
Decision-making
Quantitative Methodsofdecisionmaking Behaviouroffinancial andeconomicvariables
Impactoffinancial variablesontheperformanceofa firm
Impactofenvironmental variablesonfinancial variablesofafirm
To take better financial decisions, one must be awareof necessary legal, economic and financialenvironment.
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MAIN DECISIONS to be madeMAIN DECISIONS to be made
by a finance managerby a finance manager
Investment Decisions: Long-term Decisions
Financing Decisions: Capital Structure
Decisions
Dividend Decisions: Profit Distribution
Decisions
Liquidity Decisions: Working Capital or Short-
term Decisions
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OBJECTIVES BEFORE A FINANCEOBJECTIVES BEFORE A FINANCE
MANAGER???MANAGER???
Profit Maximisation
Profit after tax (PAT) Maximisation
Earning per share (EPS) Maximisation
Sales Maximisation
Market Share Maximisation
Firms Wealth Maximisation
Shareholders Wealth/Value Maximisation
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PROFIT MAXIMISATIONPROFIT MAXIMISATION
For any business firm, the natural objective is Profit Maximisation
and as such can be pursued to guide financial decisions of a financemanager. This objective has the following advantages:
It is a well understood objective.
It achieves sustainability for a firm as without profits, none can sustain itself for
long. Profit is also considered as a yardstick of efficiency.
In a free and competitive market, profit is the best driving and motivating force
behind all economic decisions.
The theory of Invisible Hand that ensures optimum allocation of resources for
a society in a free and competitive market also depends upon the objective of
Profit Maximisation.
It is an objective that is compatible with societys objective as well as firms
objective.
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Disadvantages of ProfitDisadvantages of ProfitMaximisationMaximisation as an objectiveas an objective
It works perfectly well when markets are perfectly competitive and free. But,
in real life, markets are full of a number of imperfections and as a
consequence, profit can not be used as a yardstick of efficiency and hence,
can guide various economic decisions to ensure best utilisation of resourcesfor the firm as well as for the society.
Profit is a vague term as it means so many things to different people that
finance manager fails to appreciate which profit should be maximised. Should
it be profit to all stakeholders or profit to only owners; before tax or after tax;
short-term profits or long-term profits; total profits or per share profits;
operating profit or net profit; Accounting profit or Economic profit; and profit
reported to shareholders or profit reported to tax authorities?
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This objective ignores risk and uncertainty attached with profit. If a firm is
earning huge profits at a very high degree of risk, then it may be dangerous
for the very existence of the firm in the periods to come? For instance, should
a finance manager divert funds to speculative activities and maximise the
profits of a firm?
It ignores the time value of money as it does not make a distinction between
profits received in future and at present. Also, it ignores the timings when the
costs are incurred and when the profits are earned.
Profit Maximisation objective concentrates only on the profitability aspects of
various decisions but ignores the financing decisions that are involved in
them. As such, it fails to ignore the costs and the risks involved in financing
decisions that are important.
Disadvantages of Profit MaximisationDisadvantages of Profit Maximisation as an objectiveas an objective ((continuedcontinued))
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OTHER OBJECTIVES...
Profit after tax (PAT) Maximisation
Earning per share (EPS) Maximisation
These two are having more or less same disadvantages as the objective
of Profit Maximization has.
Sales Maximisation
Market Share Maximisation
??????????
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Firms Wealth Maximisation
Thisobjective alsomeanstomaximizetheSTAKEHOLDERSWEALTH.
Accordingtoit,thefinancemanagershould
decidedthethingsinsuch a mannerthatthewealththatwould beclaimed by all thestakeholders- creditors, lenders,employees,society,shareholders,etc.- should bemaximum.
....?????
...\.?????
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Shareholders Wealth/ Value
Maximisation Creationofshareholders Valueinfacttakescareof
PROFIT, SUCCESSFUL MARKETING STRATEGIES, HAPPYCREDITORS and LENDERS.
Ensuring balances amongtheobjectivesofthevariousstakeholdersisnot a practical objectiveto be achieved.
Sincemanagers are accountabletotheshareholders andtheyemploythem,managersshouldwork forthe
maximum benefitsoftheshareholders.
Shareholdersvalueconsistsofdividendpayments andthemarketvalueofshares. They both are accuratelyobservableincaseoflistedcompanies.
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Shareholders Wealth/ Value
Maximisation(continued)
Ifwe assumethatstock markets areefficientthenthevaluationofthesharesreflects the fundamentals andrisk involved ofa company. Thus,marketprovides a
suitablemeasureto judgetheperformance andhence, anobjectiveworthpursuing.
Also,themarkettakesinto accountthe long-termviewtodeterminetheshareprices.
Thisobjectivetakescareofthetimevalueofmoney.
Thisobjectiveprovides anobjective andwell definedqu
antit
ative
ya
rdstick
forev
alu
ating
fin
anci
aldecisions.
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FINANCIAL ASSETS vs
REAL ASSETS
??????
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BASIC AXIOMS OF FINANCIALBASIC AXIOMS OF FINANCIAL
MANAGEMENTMANAGEMENT
Money has time value/opportunity cost.
Every financial decision involves a trade-off
between RISK and RETURN.
Financial markets are EFFICIENT.
Accounting Profit is not relevant profit concept forfinancial decisions. Profits based on cashflows aremore relevant for Financial Decision-Making.
Options have a VALUE.
Incremental/differential cashflows are important for
financial decision-making.
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Remember that ...
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LLETS NOW UNDERSTANDETS NOW UNDERSTAND --WHAT ISWHAT IS RETURNRETURN??
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RETURN IS
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RETURN...
RETURN presents-
benefits
gains profits
interest
yield theextra wegetwhenweinvestsomemoney.
Itis a positiveparameterinthesensethatmoreofit
ismoredesirable.
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LLETS NOW UNDERSTANDETS NOW UNDERSTAND --WHAT ISWHAT IS RISKRISK??
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RISK IS
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RISK IS UNDERSTOOD AS A NEGATIVE PARAMETER HAVINGRISK IS UNDERSTOOD AS A NEGATIVE PARAMETER HAVING
DIFFERENTDIFFERENT SSHHAADDEESS!!!!!!
Risk is a threat.
Risk prevents the project to realise its expected
goals.
Risk is a fear.
Risk is pessimism.
Risk is expected loss.
Risk is a chance of loss.
Risk comes out from unexpected undesirable
events.
Risk is unwanted.
Risk is variation, fluctuation and volatility.
Risk is dynamic.
Risk arises due to uncertainty.
Risk is because of change.
Risk is an odd thing out.
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RISK IS USUALLY MEASUREDRISK IS USUALLY MEASURED
AS ...AS ...
thePROBABILITY OF LOSS
the EXPECTED LOSS
VARIATIONS & FLUCTUATIONS: Range
Mean Absolute Deviation
Standard Deviation/Variance/Coefficient ofVariation
Semi-Variance Variance from Subjective Expected Value
Co-variance
the SENSITIVITY OF RETURN TO
POSSIBLE CHANGES - percentage
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TYPES OF RISK Systematic Risk
Unsystematic Risk Market Risk
Interest Rate Risk
Purchasing Power Risk or Inflation Risk
Foreign Exchange Risk
Business Risk - Operating Leverage
Financial Risk - Financial Leverage
Management Risk
Industry Risk
Economy/Country Risk
Credit Risk/Default Risk
System Risk
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IS THERE ANY RELATION
BETWEEN RISK AND
RETURN?
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HOW MAXIMIZATIONHOW MAXIMIZATION
OF SHAREHOLDERSOF SHAREHOLDERS
WEALTH TAKES INTOWEALTH TAKES INTO
ACCOUNT THE RISK OFACCOUNT THE RISK OF
A COMPANY?A COMPANY?
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FORMS OF BUSINESS
ORGANISATION SOLEPROPRIETORSHIP
PARTNERSHIP
JOINT STOCKCOMPANY
PRIVATE COMPANY:it has a minimum paid-up capital of one
lakh rupees; minimum two members; maximum 50members and by its articles, restricts the right to transfer its
shares; prohibits any invitation to the public to subscribe for
any shares in, or debentures of, the company; prohibits any
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FORMS OF BUSINESS
ORGANISATION(continued)
JOINT STOCKCOMPANY
PUBLIC COMPANY:It is not a private company; it has
minimum number of members 7 and maximum no limit; has
a minimum paid-up capital of five lakh rupees; and is a
private company which is a subsidiary of a company which
is not a private company.
CO-OPERATIVE
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AGENCY PROBLEM
Inproprietorship,partnership andcooperatives,
theowners are activelyinvolved butnormally,in
jointstock companies,owners(shareholders) and
management aretwodifferententities.
Thisseparation leadstoAGENCYPROBLEM. It
meansthatthemanagementwhichissupposed
to act as an agentoftheownersstarts acting as
aprincipal. Themanagementmaydecidethe
thingsforitsown benefitsratherthanforthe
benefitofthecompanysowners. Some
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AGENCY PROBLEM(CONTINUED...)
Lack ofperfect alignment betweenthe
objectivesofthemanagement andthoseofthe
ownersresultsinAGENCYCOST.
AgencyProblemisoneoftheseriousproblems.
Itmaycausesub-optimumdecisions;itmay
forcethemanagersto adoptedunfair andfraudulentpractices. Thefirmmayhavetoincur
a costtomitigatetheill effectsofit andthus,it
may lowerdownthevalueofshareholders.
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AGENCY PROBLEM(CONTINUED...)
Tomitigatethe agencycost,effectivemonitoringis
to bedone alongwith appropriateincentivesthat
haveto beofferedtothemanagement.
Someexamplesofthewaystomitigatethecostof
AgencyProblem are-
Moretransparency andfrequentreportingofimportantdecisions andtheir
effects.
Morepowerstoshareholders.
Havemoreinstitutional investors.
Performance linked bonus
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