Question

The overall corporate objective of most firms is to maximize the value of the firm for the owners. Apparently in their bid to achieve the above objective, management of firms makes decisions as to choice of best alternatives available, use and/or allocate resources among available alternatives as well as engage in exchanges and/or operations and other activities. Required: a) Concisely outline the key decision areas of concern that financial managers of corporate organizations mostly focus on.

b) How are the shareholders of firms able to ensure that the value of their firms is maximized?

c) Differentiate between corporate ownership and corporate management. How does the separation of corporate ownership and corporate management present problems in corporate life?

d) Enumerate and explain any three (3) cost(s) associated with agency problem(s).

Question Five a) Explain three factors that discourage businessmen from adopting the Net Present Value technique in evaluating capital investment projects.

b) Agyenkwah Company Ltd is considering investing in a Gym that costs $900,000. This investment may last for 5 years with an estimated scrap value of $150,000. The company depreciates fixed assets on cost.

The profits/(losses) from this venture are expected to be:

Year 1 2 3 4 5

P/L ($) (50,000) 95,000 300,000 185,000 1 30,000

Required: Using the Pay Back technique, should the company embark on this project? Explain your answer.

c) Nyamedea Company Ltd intends to invest in a restaurant or guest house project. The company needs an amount of $1,090,000 to build the restaurant; and $3,500,000 for the Guest House.

The following are the expected cash flows from the two projects: Years Restaurant Guest House

$ $

1 150,000 960,000

2 210,000 1,830,000

3 350,000 2,020,000

4 390,000 2,500,000

Required: Should management decide to use the Net Present Value technique, assuming a cost of capital of 15% for the Restaurant and 12% for the Guest House, which of the two projects would you advise them to embark upon?

Answer 1

Answer a:-

Financial managers are responsible for the financial health of an organization. They produce financial reports, direct investment activities, and develop strategies and plans for the long term financial goals of their organization. Financial managers focus on cash flows and outflows of cash. They plan and monitor the firms cash flow to ensure that cash is available when needeed.

Answer b:-

If management makes decisions that increase net income each year, the company can either pay a large cash dividend, or retain earnings for use in the business. a comapny earning per share(EPS) is defined as earnings available to common shareholders divided by common stock share outstanding, and the ratio is a key indicator of a firm shareholder value. When a company can increase earnings, the ratio increases and investors view the company as more valuable.

Answer c:-

Type of Structure	Ownership	Management
Corporation	Shareholders	Officers
Corporation	Shareholders	Officers
Limited Liability Company	Members	managers
General Partnership	Partners	Partners
Limited Partnership	Limited partners	General Partner

Separation of ownership and management involves placing the management of the firm under the responsibility of professionals who are not its owners. This separation allows skilled managers to conduct the complicated business of running a large company.

Answer d:-

Agency cost are a type of internal cost that a principal may incur as a result of the agency problem. They include the costs of any inefficiencies that amy arise from employing an agent to take on a task, along with the costs associated with managing the principal-agent relationship and resolving differing priorities.

Answer 5:-

(a)

It require some guesswork about the firms cost of capital. Assuming a cost of capital thet is too low will result in making suboptimal investments. Assuming a cost of capital that is too high will result in forgoing too many good investments.