Question

1. The goal of the firm is to maximise shareholder value. How do you make it sustainable in today’s business landscape? What is value? What are the constraints on sustaining a firm’s value?
2. What are the different forms of business organizations? How do different organization forms impact control and access to financing? How will you decide on the appropriate organizational form for a business?
3. Define and explain the agency problem in terms of differences in ability to diversify risk by finance and human capital. Why does it arise? Is the problem related to ethics? What are the mechanisms available to ameliorate the agency problem?

Answer 1

Yes, I do think that firm should be trying to maximize the shareholders value because it will be maximizing the prices of the shares of the company and increasing the overall share holders worth as shareholders will always look for return.

Value is related to the overall valuation of the firm and there will be constant changes in the Macro economy as well as micro economy like changing inflation rate for changing interest rate for changing demand and supply pattern which will impact the sustainable growth.

Different forms of businesses will be accessing the form of financing by determination of the cost of capital associated with those financing and the nature of the firm and preferences of the firm.

I will be deciding upon the appropriate structure of organisation by desire of its promoters and the ability of growing of the business and desire of raising of the financing.

Agency problem in the context of diversification of risk and human capital is related to excessive risks which are taken by the management of the company and excessive compensation which is undertaken by the management of the company so that would be overall leading to conflict of interest with the shareholders value maximization concept and that can be against some of the mechanism of maximization of of interest of the shareholders and it would be leading to a lower trust on management and higher conflict of interest.