Question

a) The objective of financial management is to maximise the value of the firm.”

Critically discuss how the achievement of this objective might be compromised by the conflicts which may arise between the various stakeholders in an organisation.

b) WEC Ltd is planning to save R2 million per year for five years. The first deposit, which is presently being made, and all subsequent deposits, will earn interest at a 12% annual rate

Calculate the FV of this investment if interest is compounded quarterly. Round your answer to decimal places

Answer 1

a) Maximizing value of firm might conflict with interests of various stakeholders in following ways:
1.It might have impact on environment and on the people living nearby ignoring about environment and not investing on pollution control or environmental clean up might increase the shareholder value in the short run but in the long run might create conflict with residents of the locality.
2. It might lead to lay off of employees. In order to increase return on equity companies might need to lay off certain employees. This might create conflict among employees. It might create feeling of insecurity among employees and might lead to attrition in companies.
3. Sometimes strict policies might deter supplier from supplying raw materials in future. In short term this might increase share holder value of firm but in long decreasing confidence among supplier might lead to reduced supply , increasing of prices and supply shocks.

b) Effective annual rate of compounding =(1+APR/4)^4-1 =(1+12%/4)^3-1 =9.2727%
PMT =2 million
Number of Years =5
FV using annuity due formula =(1+r)*PMT*((1+r)^n-1)/r) =(1+9.2727%)*2*((1+9.2727%)^5-1)/9.2727%)
=13.15 million or 13,150,561.57