Paper Example on Agency Theory

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The agency theory clarifies the connection amongst principals and agents in the business. Agency theory entails settling issues that can exist in agency relationship because of general objectives or various levels of risks. Settling issues emerging from the agency system comes along with the agency costs. In essence, the agency costs are a type of internal cost that emerges from an agent working for the principal.

These expenses as a result of agency theory develop as a result of major issues, for example, conflicting interests amongst shareholders and administration. It is the wish of the shareholder to run the company in a way that shareholder is highly valued, while the intention of the management is to develop the company in ways that best serves their interests and riches that may not be to the greatest advantage of shareholders.

In the interconnection between agent and principal we confront the issue of the presence of asymmetric information and risk avoidance. The principal is more likely to see the agent's activities as flawed, as the activities are not adjusted to the principal's wishes. Asymmetric information presents itself in two forms as according to the available information during decision making. At times in the agency interconnection, the free rider issue might arise. The free rider issue is a market failure that happens when individuals exploit the capacity to utilize collective resources without paying for them, similar to the situation when natives of a nation use free products without paying taxes. The free rider issue emerges in a market in which the consumers do not limit supply, and its utilization cannot be limited.

Primary and Secondary Capital Markets

Investors purchase securities directly from the companies that are selling them. As such, when a company openly sells new stocks and securities, it does so, in the primary capital market. Buying of securities on the primary market requires the company that is selling the stocks to hire an underwriting firm that will analyze the selling offer and made a plan summarizing out the cost and different points of interest of the securities to be issued. However, small investors are not targeted to be sold the securities since the company that is selling wants to sell a large volume of shares over a short period, and therefore they mostly target the large investors.

In the secondary market, companies sell securities to small investors with the company not allowed to participate. As such, the secondary market is the place securities are traded after the company has sold every one of the stocks and securities offered on the primary market. Very few investors have a better chance of purchasing or supplying securities since they are no longer barred from IPOs due to their small investments. However, an investor requires a broker to buy the securities. The price of the security changes with the market and the cost to the financial investor includes the commission paid to the broker

The Case of Credit Customers

Credit customers are very important in the business when they settle their payments in due time. Most times, companies offer discounts in a bid to attract the credit customers to pay early.

Discount = 40% of debtors who pay within ten days

Customers = the customers who typically pay their sales after 45 days

Administrative costs savings = 4,450 per year

Credit sales without discount = 1.6m per year

The cost of short-term finance = 8%

60% = 1600000

100% =?

= 100*1600000/0.6

= 2.667M

Credit sales affected = 2.667M - 1.6m = 1.06m

Receivable days ten days given

Receivables $130684 (1060000 45/365)

Administrative costs gained = 4,450

Total discount = 1060000*10% = 106000 4450

=101550

Brand Plc.

Brand Plc. Profit after tax is at 15% of shareholders funds. However, the first step in the computation of the number of shares is by calculating the number of ordinary shares. Thus, the formula is using the given value of ordinary shares divided by the price of each share price. Thus,

For 1.8, the computations are shown as below:

The calculations are shown as below:

Number of ordinary shares = 200000

The number of shares to be issued = 200000+160000

= 360000

The theoretical ex-rights are given by the formula:

= (No. of ord. Shares before the rights issue X fair value of shares)

+ (No. of shares issued through rights issue X rights price) divided by the no. of ord. Shares outstanding before the rights issue + No. of shares issued through a rights issue

= (200000 *0.5) + (160000*1.8)/ 360000

= (100000+288000)/360000

Theoretical ex-rights =1.07

The expected earnings per share are given by the formula:

Profit-after-tax = 0.15*(10288000+400000)

= 0.15 * 10560000

= 1603200

The rights issue should be issued in the form of the shares.

For 1.6, the computations are shown as below:

The computations are shown as below:

Number of ordinary shares = 200000

The number of shares to be issued = 200000+160000

= 360000

The theoretical ex-rights are given by the formula:

= (No. of ord. Shares before the rights issue X fair value of shares)

+ (No. of shares issued through rights issue X rights price) divided by the no. of ord. Shares outstanding before the rights issue + No. of shares issued through a rights issue

= (200000*0.5) + (160000*1.6)/ 360000

= (100000+256000)/360000

Theoretical ex-rights =0.98

The expected earnings per share are given by the formula:

Profit-after-tax = 0.15*(10256000+400000)

= 0.15 * 10656000

= 1598400

The rights issue should be issued in the form of the shares

For 1.4, the computations are shown as below:

Number of ordinary shares = 200000

The number of shares to be issued = 200000+160000

= 360000

The theoretical ex-rights are given by the formula:

= (No. of ord. Shares before the rights issue X fair value of shares)

+ (No. of shares issued through rights issue X rights price) divided by the no. of ord. Shares outstanding before the rights issue + No. of shares issued through a rights issue

= (200000*0.5) + (160000*1.4)/ 360000

= (100000+224000)/360000

Theoretical ex-rights =0.9

The expected earnings per share are given by the formula:

Profit-after-tax = 0.15*(10324000+400000)

= 0.15 * 10560000

= 1608600

The rights issue should be issued in the form of the

Bugle Plc.

The prospective buyer wants a return of 15 percent of corporate bonds. There are two types of investment that it is provided in the paper with the aim to be analyzing the profitable investment.

Bond 1:

Bond 1 is a 12 per cent bonds redeemable at nominal at the end of two more years. The current market value per 100 bond is 95. Hence, to calculate the price of a bond, the formula used is:

The price of a bond = c F 1 (1 + r)-t + F

R (1 + r)t

C = 12%, F = 95, r = 0.15 t = 2

= 0.12 * 95 * (1-(1+0.15)^2/0.15) + (95/ (1+0.15) ^ 2

= 11.4 * 0.15 + 71.83

=1.71 + 71.83

= 73.54

Bond 2

8 per cent bonds redeemable at 110 at the end of two more years. The current market value per 100 bond is also 95.

Present Value of Interest Payments = c F 1 (1 + r)-t + F

R (1 + r)t

C = 8%, F = 110, r = 0.15, t = 2

= 0.08 * 110 * (1-(1+0.15) ^2/ 0.15) + (110 / (1+0.15) ^2

= 8.8 * 0.15 + 77.78

=79.1

Capital Budgeting

A project should always be analyzed within a given timeframe in order to conclude on whether it can be done. There are several techniques to be used when analyzing a project and as such a good technique should be used.

Cost of machine = 900000, Cash sales = 600000, expected useful year = 8 years,

Scrap value =100000, annual costs = 400000, Cost of capital = 11%

Payback Period = Initial Investment/Cash Inflow per Period

= 900000/ (600000-400000)

= 900000/ 200000

= 4.5 Years

ROCE = Net Operating Profit / Employed Capital

= 200000/ 900000 * 100

= 0.22 *100

= 22%

Years 1 2 3 4 5 6 7 8

-900000 600000 600000 600000 600000 60000 60000 600000 600000

400000 400000 400000 400000 400000 400000 400000 400000

200000 200000 200000 200000 200000 200000 200000 200000

 

Cost of Capital 0.11

NPV $1,029,224.55

 

-900000 Initial investment

200000 Year 1 cashflow

200000 Year 2 cashflow

200000 Year 3 cashflow

200000 Year 4 cashflow

200000 Year 5 cashflow

200000 Year 6 cashflow

200000 Year 7 cashflow

200000 Year 8 cashflow

15% IRR

The NPV is better than other valuations since:

i. It is the primary measure that takes in mind the time value of money, correctly balancing for the opportunity cost of capital

ii. It gives predictable measures of the venture's worth and

iii. It measures the amount of money added to the wealth of the stockholder

 

Bibliography

Bazargan, M., Lange, D., Tran, L. and Zhou, Z., 2013. A simulation approach to airline cost-benefit analysis. Journal of Management Policy and Practice, 14(2), p.54.

Bosse, D.A. and Phillips, R.A., 2016. Agency theory and bounded self-interest. Academy of Management Review, 41(2), pp.276-297.

Luo, X., Wang, H., Raithel, S. and Zheng, Q., 2015. Corporate social performance, analyst stock recommendations, and firm future returns. Strategic Management Journal, 36(1), pp.123-136.

Marston, R.C., 2014. Investing in Bonds: The Wider Bond Market. Investing for a Lifetime: Managing Wealth for the New Normal, pp.129-143.

Petros, J., Hanan, C.C., Bailey, A.G., Gupta, S.D., Mellyn, K.L., Saal, M., Alexander, M. and Mondschein, C., JPMorgan Chase Bank and NA, 2014. Electronic multiparty accounts receivable and accounts payable system. U.S. Patent 8,712,887.

 

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