1、Financial Objectives of the Firm and Agency Problems,Dr. Fangming Xu,1,04/01/2019,Business Finance Decisions,About this Module,15 credit module Moodle Key: BCBS1 Some of the concepts are challenging and you need to devote your time to study each topic. Assessment: Two-hour closed book examination (1
2、00%) Contact details: See me in my office (G111) during office hours Email: fangming.xubcu.ac.uk,2,04/01/2019,Business Finance Decisions,Topics,Financial Objectives of the Firm and Agency Problems Time Value of Money Investment Appraisal Methods Sources of Long-term Capital and Cost of Capital Sourc
3、es of Short-term Capital and Working Capital management Financial Ratio Analysis,3,04/01/2019,Business Finance Decisions,Resources,Main Course Texts: Watson, D., and A. Head, 2010 (W&H), Corporate Finance: Principles & Practice, FT Prentice Hall, Fifth edition. McLaney, E., 2009 (EM), Business Finan
4、ce: Theory and Practice, FT Prentice Hall, Eight edition. Atrill, P., 2009 (PA), Financial Management for Decision Makers, FT Prentice Hall, Fifth edition. Recommended Texts: Arnold, G., 2008 Pike, R., and B. Neale, 2009 The financial press and relevant business journals,4,04/01/2019,Business Financ
5、e Decisions,Learning Objectives,Understand the role of financial managers; Explain the problems of profit maximisation; Understand why shareholder wealth maximisation (SWM) is the primary financial objective of a firm; Describe the agency problem and explain how this problem may be dealt with.,5,04/
6、01/2019,Business Finance Decisions,Business Finance,Business finance is concerned with developing and implementing strategies to achieve the financial objectives of an organisation. This involves planning and controlling the provision of resources, the allocation of resources, and the control of res
7、ources. The fundamental aim of financial managers is the optimal allocation of the resources.,6,04/01/2019,Business Finance Decisions,Role of the Financial Manager,A financial managers decisions includes three parts and they are highly interrelated.,7,04/01/2019,Business Finance Decisions,Possible C
8、orporate Objectives,What should be the primary objective of corporate finance and financial mangers? Shareholder Wealth Maximisation (SWM) Profit Maximisation Sales Maximisation Survival Social responsibility,04/01/2019,Business Finance Decisions,8,Problems of Profit Maximisation,Measurement difficu
9、lties (accounting issues) associated with profit. The timescale (short or long) over which profit should be maximised. Profit fails to take account of risk and the time value of money.,9,04/01/2019,Business Finance Decisions,Corporate Objectives,Businesses exist to create value (make money) for thei
10、r owners (shareholders). Thus the company should make investment and financing decisions with the objective of maximising shareholders wealth. It is important to note that shareholders take a long-term perspective.,04/01/2019,Business Finance Decisions,10,Shareholder Wealth Maximisation,Shareholder
11、wealth maximisation is achieved by maximising the (1) value of dividends and (2) capital gains that shareholders receive over time. Capital gains reflect future dividends. Shareholders wealth depends on: magnitude or size of cash flows timing of cash flows associated risk,04/01/2019,Business Finance
12、 Decisions,11,Shareholder Wealth Maximisation,This is consistent with maximising the (1) current share price, (2) the market value of company, and (3) the wealth of shareholders.,04/01/2019,Business Finance Decisions,12,NPV B,NPV C,NPV A,NPV D,Corporate Net Present Value,Share Price,SWM,1,2,3,Shareh
13、older Wealth Maximisation,Maximisation of a companys share price is a surrogate objective for maximisation of shareholder wealth.Overall, a companys value and the shareholder wealth will be maximised if the financial manager makes good investment, financing, and dividend decisions.,04/01/2019,Busine
14、ss Finance Decisions,13,SWM in Practice,Dana Petroleum plc is a leading British independent oil business that is: committed to maximising shareholder value through the creation and execution of high impact opportunities. Diamond Corp plc is a diamond producer focused on: maximising shareholder value
15、 through the development of high margin diamond production assets.,04/01/2019,Business Finance Decisions,14,What about Stakeholders?,Shareholders are not the only ones that have a financial interest in the company. A stakeholder is anyone with an interest in a business: Shareholders Employees Manage
16、rs Supplier Customers Community,04/01/2019,Business Finance Decisions,15,Stakeholders Conflict,16,04/01/2019,Business Finance Decisions,Agency Problem,Agency problem, which arises when managers make decisions which are not consistent with the objective of SWM. This occurs because of: the divergence
17、of ownership and control the conflict of objectives between managers (agents) and shareholder (owners) the asymmetry information between managers and shareholders,04/01/2019,Business Finance Decisions,17,Signs of an Agency Problem,Managers finance a company mainly with equity finance. Managers accep
18、t low risk, short payback investment projects. Managers diversify business operations. Managers follow pet projects. Managers are rewarded for performance that is below average.,04/01/2019,Business Finance Decisions,18,Solution to Agency Problem,Potential options may fall into one of the following a
19、reas: Do nothing Managers will engage in suboptimal behaviour Shareholders are satisficed rather than satisfied Monitoring Costly in terms of time and mony Create free-riding problems Reward good behaviour Performance-related pay (PRP) Executive share option scheme,04/01/2019,Business Finance Decisions,19,Summary,The primary objective of a firm is shareholder wealth maximisation: Not the same as profit maximisation or sales maximisation To achieve SWM the needs of other stakeholders must be considered Need to solve agency problems,04/01/2019,Business Finance Decisions,20,
