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In the corporate form of ownership, the shareholders are the owners of the firm.

The shareholders elect the directors of the corporation, who in turn appoint the firm s management. This separation of ownership from control in the corporate form of organization is what causes agency problems to exist.

Management may act in its own or editiob else s best interests, rather than those of the shareholders.

If such events occur, they may contradict the goal of maximizing the share price of the equity of the firm. Such organizations frequently pursue social or political missions, so many different goals are conceivable.

One dinance that is often cited is revenue minimization; i. A better approach might be to observe that even a not-for-profit business has equity. Thus, one answer is that the appropriate goal is to maximize the value of the equity.

Presumably, the current stock value reflects the risk, timing, and magnitude of all future cash flows, both short-term and long-term. If cogporate is correct, then the statement is false. An argument can be made either way. Dorporate the one extreme, we could argue that in a market economy, all of these things are priced. At the other extreme, we could argue that these are non-economic phenomena and are best handled through the political process. A classic and highly relevant thought question that illustrates this debate goes something like this: What should the firm do?

The goal will be the same, but the best course of action toward that goal may be different finxnce of differing social, political, and economic institutions.

The goal of management should be to maximize the share price for the current shareholders. However, if the current management cannot increase the value of the firm beyond the bid price, and no other higher bids come manuual, then management is not acting in the interests of the shareholders by fighting the offer.

Since current managers often lose their jobs when the corporation is acquired, poorly monitored managers have an eolutions to fight corporate takeovers in situations such as this. We would expect agency problems to be less mnual in other countries, primarily due to the relatively small percentage of individual ownership.

Fewer individual owners should reduce the number of diverse opinions concerning corporate goals. The high percentage of institutional ownership might lead to a higher degree of agreement between owners and managers on decisions concerning risky projects. In addition, institutions may be better able to implement effective monitoring mechanisms on managers than can individual owners, based on the institutions deeper resources and experiences with their own management.

The increase in institutional ownership of stock in the United States and the growing activism of these large shareholder groups may lead to a reduction in agency problems for U. However, this may not always be the case. If the managers of the mutual fund or pension plan are not concerned with the interests of the investors, the agency problem could potentially remain the same, or even increase since there is the possibility of agency problems between the fund and 99th investors.

How much is too much? Who is worth more, Ray Irani or Tiger Woods? The simplest answer is that there is a market for executives cirporate as there is for all types of labor.

## Podcast: Reimagining Communications

Executive compensation is the price that clears the market. The same is true for athletes and performers. Having said that, one aspect of executive compensation deserves comment. A primary reason executive compensation has grown so dramatically is that companies have increasingly moved to stock-based compensation. Such movement is obviously consistent with the attempt fimance better align stockholder and management interests.

In recent years, stock prices have soared, so management has cleaned up. It is sometimes argued that much of this reward is simply due to rising stock prices in general, not managerial performance.

Perhaps in the future, executive compensation will be designed to reward only differential performance, i. Finqnce the current share price is the same as maximizing the future share price at any future period.

### KYOCERA Document Solutions

The value of a share of stock depends on all of the future cash flows of company. Another way to look at this is that, barring large cash payments to shareholders, the expected price of the stock must be higher in the future than it is today. Assuming positive cash flows and interest rates, the future value increases and the present value decreases. Assuming positive cash flows and interest rates, the present value will fall and the future value will rise.

The better deal is the one with equal installments. APRs generally don t provide the relevant rate. The only advantage is that they are easier to compute, but, with modern computing equipment, that advantage is not very important. The reason is that the freshman gets to use the money for much longer before interest starts to accrue.

It s a reflection of the time value of money. This will probably make the security less desirable. TMCC will only repurchase the security prior to maturity if it is to its advantage, i. Given the drop in interest rates needed to make this viable for TMCC, it is unlikely the company will repurchase the security.

This is an example of a call feature. Such features are discussed at length in a later chapter. The key considerations would be: Thus, our answer does depend on who is making the promise to repay. The Treasury security would have a somewhat higher price because the Treasury is the strongest of all borrowers.

This rise is just a reflection of the time value of money. Inthe price will probably be higher for the same reason. We cannot be sure, however, because interest rates could be much higher, or TMCC financial position could deteriorate.

Either event would tend to depress the security s price. All-end-of chapter problems were solved using a spreadsheet. Many problems require multiple steps. Due to space and readability constraints, when these intermediate steps are included in this solutions manual, rounding may appear to have occurred.

However, the final answer for each problem is found without rounding during any step in the problem.

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The simple interest per year is: Because interest compounds on the interest already earned, the interest finxnce in part c is more than twice the interest earned in part a. With compound interest, future values grow exponentially. To find the PV of a lump sum, we use: To answer this question, we can use either the FV or the PV formula.

Both will give the same answer since they are the inverse of each other. We will use the FV formula, that is: To find the length of time for money to double, triple, etc. This is an important concept of time value of money. This occurs when the FV is less than the PV.

A consol is a perpetuity. To find the PV of a perpetuity, we use the equation: To find the PVA, we use the equation: The reason is that X has greater total cash flows.

At a lower interest rate, the total cash flow is more important since the cost of waiting the interest rate is not as great.

At a higher interest rate, Y is more valuable since it has larger cash flows. At a higher interest rate, these bigger cash flows early are more important since the cost of waiting the interest rate is so xorporate greater. Using the PV of a perpetuity equation: For discrete compounding, to find the EAR, we use the equation: Using the equation for discrete compounding: Doing so, we get: The number of compounding periods within a rosd will also affect the EAR. The cost of a case of wine is 10 percent less than the cost of 12 individual bottles, so the cost of a case will be: The cash flows are an annuity due, so: He really can earn about percent buying wine by the case.

The only question left is this: Here, we need to find the length of an annuity. We know the interest rate, the PV, and the payments.

Using the PVA equation: Here, we are trying to find the interest rate when we know the PV and FV. Using the FV equation: To find the APR, we multiply this rate by the number of weeks in a year, so: To find the FV of a lump sum with discrete compounding, we use: To find the future value with continuous compounding, we use the equation: The future value increases when the compounding period is shorter because interest is earned on previously accrued interest.