The separation of ownership and control in corporations may result in management pursuing goals other than shareholder wealth maximization, such as maximization of their own personal welfare utility. An agency relationship occurs when one or more individuals the principals hire other individuals the agents to perform a service on behalf of the principals.
Two of the most important agency relationships in finance are between the stockholders principals and management agents , and between the owners agents and creditors principals. Agency costs are incurred when attempting to control agency problems. Agency problems arise when the agent makes decisions consistent with the maximization of his or her own utility rather than the maximization of the utility of the principals.
The controller usually has responsibility for all accounting related functions, such as financial accounting, cost accounting, and accounting information systems.
The treasurer normally has responsibility for the acquisition, custody, and expenditure of funds, including cash and marketable securities management, capital budgeting analysis, financial, and pension fund management, and financial planning. Because not all companies divide the responsibilities in this manner, the actual functions performed by the controller and treasurer will vary from company to company.
Financial management requires an understanding of macroeconomic concepts dealing with monetary and fiscal policy. Knowledge of these concepts is necessary in making company sales forecasts and in raising funds in the money and capital markets. The bondholders in the RJR Nabisco takeover case wanted to block the transaction because the takeover was to be financed with a substantial increase in the amount of debt, and therefore an increase in the risk of default.
The case of the bondholders was rejected in the courts because, it was argued, these knowledgeable investors knew they were exposed to this type of event risk when they purchased the bonds, and presumably were compensated for the expected risk in the form of the risk premium earned on the bonds. By declaring bankruptcy, Kodak hoped to protect itself from the claims of creditors while it sought a way to either sell or restructure its assets.
Presumably, the management at Kodak thought that the bankruptcy declaration would provide it with an opportunity to restructure. Firms that expect their employees to act according to a high standard of ethical behavior can expect to experience lower litigation costs. Of course, there still is the potential agency conflict between creditors and owners. However, even in this case the risk to creditors is reduced because the owner has unlimited personal liability for the debts of the firm.
Social Science. Political Science. Literature Guides. Popular Textbooks. Buy this textbook Buy launch. View More Textbook Editions. Section Chapter Questions. Problem 1QTD. Problem 2QTD. Problem 3QTD. Problem 4QTD. Problem 5QTD. Problem 6QTD. Problem 7QTD. Problem 8QTD. Problem 9QTD. Problem 10QTD. Problem 11QTD. Problem 12QTD. Problem 13QTD. Problem 14QTD. Problem 15QTD. Problem 16QTD. Problem 17QTD. Problem 18QTD. It explores the international aspects of financial management, examin.
See examples below:. Shareholder wealth is the current worth of the anticipated upcoming returns to the proprietors of The saving-investment cycle comprises of pure savers overflow investing units exchanging reserves The limitations of the ratio analysis are as follows, Ratios cannot be calculated effectively when Deferred taxes arise in financial reports because of timing differences of some expenses.
The same Indenture is an agreement among issuing company and lenders in the obligation of debt stipulating The definition of nonvoting stock associated with common stock is as follows: A nonvoting stock that Risk is nothing but the probability of any adverse occurrence of an event.
In finance, risk is the
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