Topic Corporate Financing & Human Behavior in Finance

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Internal funds are obtained from the retention of earnings. If firms require external financing, the financial managers can structure equity or debt to finance a firm’s operations. Equity represents ownership interests and can be either common or preferred stock. Debt is money borrowed from creditors.

Intermediaries serve the role of servicing savers and borrowers to achieve their desired pattern of inter-temporal consumption. Instead of savers and borrowers having to deal with each other on an individual basis, they deal with the intermediary. The intermediary realizes a profit by lending at a higher rate than it pays savers (the spread).

For the Scenario below, you are the CFO. Share with us what you explaining to your fellow C suite members and the board of directors.

Scenario:

Boudin Wireline Services, Inc. in Estelle, Louisiana is contemplating an acquisition of Lagniappe Consulting, LLC, a complimentary company based in Lafayette, Louisiana. Boudin is an S Corporation and Lagniappe is a limited liability company. The venture capitalist believe the structure of both companies is not correct to do an initial public offering of $100 million. The venture capital firm has suggested a C corporation. The venture capitalist will be taking an equity kicker in the deal, three board seats, and have expressed their desire to maximize profits. The CFO meets with the other C suite members and the board of directors to explain what is happening. Make a meaningful comment on at least one of your classmate’s post.

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Ethical behavior is a necessary condition for shareholder wealth maximization as opposed to profit maximization. Do you believe the goal of the firm is always consistent with ethical considerations? What would you do if you could implement an unethical (and undetectable) action that would increase firm value? Hint: Review Agency Theory in this module’s home page and conduct external research (as applicable)

Influence of Agency Theory

A literature review of certain aspects of agency theory (Ezelle, 2011) contends the following:

Lessening the effect of agency problems can be accomplished by offering incentives to the agent to align actions comparable to what is desired by the principal or by monitoring the behavior of the agent. Either effort to mitigate the agency problem has agency costs which are classified as bonding costs, agency costs, or residual costs (Eisenhardt, 1989; Jensen & Meckling, 1976; Ross, 1973). Monitoring costs would include those activities owners or lenders consider necessary to oversee the agent behaviors and control agent costs by means of auditing, implementation of internal controls, creation of various policies and procedures, and implementing budgeting so as to protect their investment. Bonding costs are those agency costs which provide the owners some form of security to curtail the agent acquiring benefits from the firm by auditing, requiring agent insurance, and contractually limiting the agent’s authority. The residual costs are the losses which will occur when incentives exist for the agent to consume perquisites of the firm which benefit the agent to the detriment of the principal.

The conflict between the owner as principal, and manager as agent, can be framed in a branch of the economic theory of games, agency theory. Agency theory is concerned with the design of contracts which are used in the motivation of rational agents to act on the behalf of the principal when the interests of the agent would conflict with that of the principal. In effect the modeling of a firm composed of a large number of owners and managers with conflicting interests is analogous to the separation of ownership and control of a firm which is composed of a single owner and a single manager.

Type of assignment: Essay

Subject: Finance

Pages: 2/550

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