What is an agency cost or agency problem in the context of corporate management? Does the...

What is an agency cost or agency problem in the context of corporate management? Does the agency problem interfere with maximizing shareholder wealth? Why or Why not?
Explain the Free Cash Flow (FCF) approach to share valuation. What are the key steps involved in the FCF approach to share valuation?

Expert Solution

The agency cost is the cost bone by the principal when the agent takes decisions on the behalf of the principal, in context of a company the company is run by the senior management (i.e agent) while the stakeholders (principal) like board and the shareholders etc are the ones that are bearing the direct consequences of the actions of the senior management.

The interest of the stakeholders is the maximization of the wealth while the management wants more salaries and other monetary and non monetary benefits. So, the agency model does pose a problem in the maximization of the stakeholders wealth as the interest of the stakeholders i.e the principal is different from the managers i,e the agents, there are certain decisions which adhere to the interests of one party only i,e either the stakeholders or the management and in that scenerio the conflict of interests arises.

jeff jeffy answered 3 years ago

What is meant by an agency cost or agency problem as it relates to corporate finance?...

What is meant by an agency cost or agency problem as it relates to corporate finance? Name and discuss any two mechanisms Boards of Directors use to control or minimise agency costs or the agency problem?

What is the agency problem? And, Why does the agency problem not exist in a proprietorship?...

What is the agency problem? And, Why does the agency problem not exist in a proprietorship? Or does it? Identify a few sources of the agency problem.

Corporate Financial Management: 7. In corporate finance, explain what is meant by the agency relationship. Discuss...

Corporate Financial Management: 7. In corporate finance, explain what is meant by the agency relationship. Discuss how agency costs come about and at least three ways in which these costs can be reduced. (50 %) Explain what is meant by corporate governance. Why is corporate governance important to the shareholders of a firm? Critically assess the following statement: “the same corporate governance rules should be applied to all companies”. (50 %)

In the context of management control, what is the issue of myopia and how does it...

In the context of management control, what is the issue of myopia and how does it arise? How might one attempt to resolve this myopia problem? (1,000 words essay)

Agency problem has led to the requirement of an efficient corporate governance. What mechanisms are used...

Agency problem has led to the requirement of an efficient corporate governance. What mechanisms are used around the world to keep this agency problem under control?

a) What relationship does the agency theory examine in a firm? What is/are the associated problem/costs...

a) What relationship does the agency theory examine in a firm? What is/are the associated problem/costs of agency theory that would arise and affect the value of a firm? Why is it more important in a public corporation than in a private corporation? b) “The higher the standard deviation, the lower the risk premium should be”? Do you agree? Explain based on systematic risk principle under CAPM.

What does the Context Algorithm do? Full explain with example plz.(probability problem)

Why is agency law especially important in the business and government context? What are the five...

Why is agency law especially important in the business and government context? What are the five types of agents? What distinguishes an employee from an independent contractor? Why do employers frequently try to pass off employees as independent contractors?

There are many objectives of financial management in corporate. What is the main goal of financial management in the corporate?

5) Why does an “agency problem” exist in corporations? Why is this problem unique to corporations...

5) Why does an “agency problem” exist in corporations? Why is this problem unique to corporations and not partnerships or sole proprietorships? How can corporations minimize this problem? (10pts) 6) What is the concept of tax inversion? Why is the practice attractive to U.S. corporations? (5pts) 7) Who are “insiders” of a corporation? Why is illegal insider trading prohibited? Provide 2 examples of insider trading cases (provide names of the companies, the individuals involved, and the crime committed). (10pts)

Question