Question

Question No 1:

(A). Sohar Company is doing manufacturing business in Oman. Recently, it started spending funds to acquire modern technology which will improve the quality of products that leads to increase its sales. This development will positively influence the investors and help to maximize the market value of company shares.

Requirement:
(i) Which objective of Financial Management will be achieved by Sohar Company by above development?
(ii) Explain any two arguments in favor of such objective.                                      


(B ) Agency is a branch of economics relating to the behavior of principals (such as owners)
       and their agents ( such as managers).
      Why do conflicts arise between owners and managers in companies and what will be its
      effect on the interests of management? Explain.                                                 


(C) At present the collection management of receivables of ABC Company is very weak.
       The company wants to improve it and needs your help.
        What are the suggestions do you give to improve the collection management
         of ABC Company especially in the following areas?                                     
         (i) Delay in collection of receivables         (ii) Delay in sending invoices to customers
         (iii) Customers complaints on products     (iv) Lack of training for staff

Answer 1

A) -I) when the price of the share increases the shareholder value maximization is achieved. The shareholders value increases when the price of the stock and they gain from it.

II) The two arguments in favor of shareholders wealth maximization are

· Shareholders contribute capital to the company which is very important for the survival of the company hence creating shareholder wealth is very important.

· If the shareholder wealth is being created then that means that company is making profits and it can contribute and create values for other stakeholders in the society.

B) Agency conflict is a term that is used to describe a situation in which when an agent who is supposed to take action for the best interest for the principal does not do but take actions which benefit him even at the expense of the principal. These types of conflict arise because principal and agent have different interest and both tries to achieve their own interest over the interest. The management sometimes focuses on their own short-term interest rather than the long-term interest of the principal.

C)

I) delay in collection of receivables: if management wants to improve the collection then it should focus on speeding the collection of receivable process not delaying it. This can be done by reducing the credit sales or credit period.

II) Delay in sending invoices to customer: There should not be any delay from the company side to sending invoice to the customer because delaying them would mean more delay in payment.

III) Customer complaints on products: Customer complaints on products should be taken seriously and resolved on time, this makes the customer loyal and it also helps in speeding up the process of payment.

IV) Lack of training for staff: There should be proper training for staff involved in the process of the invoicing and collection of receivables so that error can be avoided and payment can be received on time.