Wk 1 Discussion

What is meant by an berth cost or agency occupation? Do these interfere with shareowner wealth maximization? Why? What mechanisms minimize these costs/problems? Are decision maker hire contracts effective in mitigating these costs/problems? Our textbook defines an agency problem as a conflict between the deaths of a stanchs owners and its managers (Megginson & Smart, 2009). It then defines agency costs as dollar costs that emanate because of this conflict.In the corporate structure, stockholders are the owners of the firm, and they elect a board of directors to oersee the firm and help protect their investment. The board then hires the right corporate managers to take the field the firm with the goal of maximizing the wealth of the shareholders. In a vacuum, this is a perfect framework by which to run a corporation however, the earthly concern is that a corporations managers are influenced and driven both by the companys goals and by their own personal goals.Our textbook lis ts a few of those goals on page 25 as personal wealth, subscriber line security, lifestyle, prestige, and perks (Megginson & Smart, 2009). These agency problems can directly interfere with the corporations goal of shareholder wealth maximization because of the costs that these problems create. For example, an executive might father so focused on his personal goals that he takes his eye dour the ball of the companys goals. In addition, the board may entertain to institute costly auditing or bonding measures to ensure the effectiveness of its managers, or protect the company from executive wrongdoing.Our text lays out three loose ways that shareholders can try to mitigate these types of agency problems they are relying on marketplace forces, structured executive compensation packages, and the auditing/bonding measures discussed above (Megginson & Smart, 2009). The market forces category is loosely defined as the pressure put on a business by the rest of the market and its compet itors. This can ostensible itself in the form of a hostile takeover, whereas another entity purchases a imperative interest in the firm with the goal of making a good on that investment.Generally, under-performing companies are the prime targets of hostile takeovers, so it makes sense that adjust shareholder and executive goals is a major way to avoid that. iodin popular way of aligning these goals is through the use of elaborate, structured compensation plans for executives which directly tie an executives salary to the performance of the company, unremarkably and specifically its stock price (Megginson & Smart, 2009). These compensation plans have become the average for American corporations, and their effectiveness in solving the agency problem is debatable.On champion hand, it should drive an executive to strive to maximize the shareholder wealth, and it also helps companies to suck and retain the best available managers. On the other hand, it serves to sometimes wildly inflate the compensation paid to these executives, either by corporations trying to run competitive for the best talent, or through easily achievable goals and uncrowned maximums. The structured plans, if done correctly, are an effective way to help fix the goal of wealth maximization, but they are also by explanation agency costs.Hence, agency problems are inherent to our American corporate system. workings Cited Megginson, W. L. , & Smart, S. B. (2009). Introduction to Corporate Finance. Mason, OH South-Western. Chapter 2 If you were a commercial credit psychoanalyst fool awayd with the responsibility of making an accept/reject decision on a companys loan request, with which financial statement would you be most implicated? Which financial statement is most likely to provide pertinent entropy about a companys ability to repay its debt?If I was in charge of approving or denying a loan for a company, I would be most concerned with that companys last few Income narratives. A n Income arguing provides the details of a firms business performance over a set period of time, and it shows all sources of revenues and expenses for a business. Analysis of an Income controversy will clearly show the health of a companys business operations. This question is misleading though, because any loan approval position would obviously also be concerned with a companys Balance Sheet, Statement of Cash Flows, and Notes to Financial Statements documents as well.Through a fundamental review of all the firms statements, an analyst can approximate the most important ratios to determine the credit-worthiness of a prospective loan customer. The Statement of Cash Flows, in particular, is the single best document for determining if a firm has the required liquidity to repay a new obligation. This is achieved by calculating important ratios such as the OCF and the FCF. However, since the Statement of Cash Flows is comprised only if of data presented on other financial statemen ts, it did not rise to the train of most concerned with for the purpose of answering this question.