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 2 years ago

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