Wk 1 Discussion

What is meant by an means cost or agency business? Do these interfere with shareholder wealth maximation? Why? What mechanisms minimize these cost/problems? Are executive compensation contracts effective in mitigating these costs/problems? Our textbook defines an agency problem as a impinge between the goals of a fasts stimulateers and its managers (Megginson & Smart, 2009). It then defines agency costs as dollar costs that arise because of this conflict.In the corporate structure, stockholders are the owners of the firm, and they elect a board of directors to oversee the firm and attend to entertain their investment. The board then hires the right corporate managers to run the firm with the goal of maximizing the wealth of the shareholders. In a vacuum, this is a perfect framework by which to run a corporation however, the reality is that a corporations managers are influenced and driven both by the unions goals and by their own personal goals.Our textbook lists a few of th ose goals on page 25 as personal wealth, line of products security, lifestyle, prestige, and perks (Megginson & Smart, 2009). These agency problems can directly interfere with the corporations goal of shareholder wealth maximization because of the costs that these problems create. For example, an executive might become so focused on his personal goals that he takes his spirit off the ball of the companys goals. In addition, the board may have to institute dearly-won auditing or bonding measures to ensure the effectiveness of its managers, or protect the company from executive wrongdoing.Our text lays turn out three broad demeanors that shareholders can try to mitigate these types of agency problems they are relying on food market forces, structured executive compensation packages, and the auditing/bonding measures discussed above (Megginson & Smart, 2009). The market forces category is loosely defined as the pressure put on a business by the rest of the market and its competit ors. This can unmingled itself in the form of a hostile takeover, whereas another entity purchases a controlling interest in the firm with the goal of making a profit on that investment.Generally, under-performing companies are the prime targets of hostile takeovers, so it makes champion that aligning shareholder and executive goals is a major way to avoid that. One popular way of aligning these goals is through the use of elaborate, structured compensation plans for executives which directly tie an executives payment to the cognitive operation of the company, usually and specifically its stock price (Megginson & Smart, 2009). These compensation plans have become the norm for American corporations, and their effectiveness in solving the agency problem is debatable.On one hand, it should drive an executive to strive to increase the shareholder wealth, and it also helps companies to attract and retain the best available managers. On the other hand, it serves to sometimes wildly i nflate the compensation paid to these executives, either by corporations trying to stay competitive for the best talent, or through easily achievable goals and uncapped maximums. The structured plans, if done correctly, are an effective way to help insure the goal of wealth maximization, but they are also by definition agency costs.Hence, agency problems are inherent to our American corporate system. Works Cited Megginson, W. L. , & Smart, S. B. (2009). Introduction to Corporate Finance. Mason, OH South-Western. Chapter 2 If you were a mercenary credit analyst sproutd with the responsibility of making an accept/reject decision on a companys bring request, with which financial statement would you be most touch? Which financial statement is most probable to provide pertinent information about a companys ability to repay its debt?If I was in charge of approving or denying a loan for a company, I would be most concerned with that companys last few Income teachings. An Income State ment provides the details of a firms business performance over a set period of time, and it shows all sources of revenues and expenses for a business. Analysis of an Income Statement will intelligibly show the health of a companys business operations. This question is misleading though, because any loan approval authority would obviously also be concerned with a companys ratio Sheet, Statement of cash Flows, and Notes to Financial Statements documents as well.Through a thorough review of all the firms statements, an analyst can calculate the most important ratios to determine the credit-worthiness of a prospective loan customer. The Statement of Cash Flows, in particular, is the single best document for determining if a firm has the required fluidity to repay a new obligation. This is achieved by calculating important ratios such as the OCF and the FCF. However, since the Statement of Cash Flows is comprised entirely of data presented on other financial statements, it did not rise to the level of most concerned with for the purpose of answering this question.