Question

Answer these questions:

3. Identify and how to calculate arbitrage opportunity

4. Challenges to shareholder value maximization

Answer 1

Answers-

Q 3)

Arbitrage Opportunity

Arbitrage Oppotunity is the prooess of identifying the differences of prices in the similar financial instruments in different markets and executing the trades to generate profit from these diffderences in price. it can also be discribed by taking the advantage of differences in price on the same instrument to make risk free profit.

For illustration let there be a vegetable market A where one kg potatoes sells for $ 10 and suppose there is another vegetable market B in the same place where onekg of potatoes sells for $ 12 and potatoes in both markets are completely identical, so one should buy  potatoes in market A and sell potatoes in market B ( Buy at $ 10 and sell at $12) to make a risk free profit of $ 2 on 1 kg of potatoes.

Q 4)

Challenges to shareholder value maximization

The challenges arises from agency problems where the mangers has conflict with shareholders. There are some of the practices given below that can effect the prospects of shareholders value maximization.  

1) The managers are willing to undertake a risky project that may or may not add value to the company and decreases the stock price of company which will decrease the shareholders value.
2) The senior management is getting salaries and compensation like perks that are above industry standards and more than peer companies in the same industry.
3) The directors are close to company management and hence can agree or favor the decisions made by senior management that can harm the prospects of shareholders and their value maximization.
4) The CEO is one of the directors of the company which is not a good practice of corporate governance and will effect the shareholders.
5) The auditing is done by the internal auditing team with out appointment of any independent auditors which is bad corporate governance practice and can lead to fraud in accounting practices that affects the shareholders value.