corporate finance corporate investing and financing decisions

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1、十一CorporateFinance:CorporateInvestingandFinancingDecisions1.A:AnOverviewofFinancialManagementa:Discusspotentialagencyproblemsofstockholdersversus1)managersand2)creditors.Anagencyrelationshipiscreatedwhendecision-makingauthorityisdelegatedtoanagentwithouttheagentbeing

2、fullyresponsibleforthedecisionthatismade.Anagencyrelationshipoccursintwocommoncorporatescenarios:1.thecompany’sstockholdersdelegatedecision-makingauthoritytothemanagers(agents),butthemanagersdonotreceivethefullbenefitorcostoftheirperformance,2.thecompany’sdebtholders

3、delegateauthoritytomanagerswhoactonbehalfoftheshareholders.Inthefirstscenario,managementwillnotbearthefullimpactoftheirdecisionssincetheydonotown100percentofcompany.Inthesecondscenario,agencyrelationshipmayoccurwhencreditorslendmoneytocorporations.Creditorslendbasedo

4、nspecificbusinessandfinancialriskexpectations.Thestockholders/managementwillbenefitfromriskystrategiesthatsimultaneouslyincreasetheprobabilityofsuccessandbankruptcy.Themanagerreceivesthefullbenefitofsuccess,butthecreditorbearstheresponsibilityforthebankruptcy.Thisiso

5、nereasonloansincludemanyrestrictivecovenantsonthecorporation’sbehavior.b:Describefourmechanismsusedtomotivatemanagerstoactinstockholders'bestinterests.1.Managerialcompensation.Thetotalmanagerialsalarypackagemustcompensatemanagersfortheirperformance.Thisiscommonlydone

6、throughannualperformancebonusesandlong-termstockoptions,inadditiontoanannualsalary.Therearetwomainmethodsthatareusedtograntsharestomanagement:1.Performanceshares:Themanagerreceivesacertainnumberofsharesbasedonthecompanyachievingpredefinedperformancebenchmarks.2.Execu

7、tivestockoptions:Managementisgrantedanoptiontobuythefirm’ssharesatapre-specifiedpriceonaspecificfuturedate.Executivestockoptionsaretypicallyissued¡°out-of-the-money¡±togivemanagementtheincentivetotakeactionsthatwillboostthecompany’sstockprice.1.Directinterventionbysh

8、areholders.Aslargeinstitutionsincreasinglyownshares,theseinstitutionshavethepowerandsophisticationtopersuasivelyinterveneoncorporat