In Financial Management it´s generally assumed that the goal of a private firm is shareholder
wealth maximization respectively maximizing shareholder value (ACCA BPP, 2012, p. 5).
This assumption correspond with a recent statement of Philip Clarke (2013) - Chief Executive
Officer of Tesco who declared that ‘[e]verything [they] are doing reflects [their]
determination to deliver shareholder value’. The question arises if shareholder wealth
maximization is an appropriate goal since there are other individuals besides the shareholders
that are affected by the activities of a firm. Another point is that managers often do not act in
shareholders best interest in order to maximize their own utility. This conflict of interest is
described by the agency theory. Furthermore the agency relationship complicates the
achievement of the goal of shareholder wealth maximization (Van Horne and Wachowicz,
2009, p.5).
Recently shareholders of the former Yellow Pages publisher Hibu blame the management not
to act in their best interest because of both a lack of information provided by directors and by
restructuring the company with a debt-for-equity swap that wipes shareholders out. As a
consequence of Hibu’s oppressive debt mountain the debt-for-equity swap enables major
lenders to take control over the company (Spanier, 2013). In this context the concept of cost
of capital and its calculation provides an approach to the costs of financing decision.
(McLaney, 2011,p.296). Since the debt-for-equity swap restructures Hibu´s balance sheet it is
of crucial importance to examine the sources of capital that are discussed in this context in
order to evaluate the reasonableness of the debt-for-equity swap from a economical
perspective.
Section 1 of this assignment focuses on the characteristics of shareholders’ wealth
maximization as an organizational goal of management and discusses its link with the Agency
Theory. Section 2 gives an insight into the concept and the calculation of cost of capital. The
3rd section critically evaluates the different sources of capital discussed in the previous
section. The last section summarizes the main points of the assignment and provides a
conclusion.
Table of Contents
- 1. Approach
- 2. Shareholder Wealth Maximization as an Organizational Goal for Private Firms and its Link to the Agency Theory
- 3. The Concept of Cost of Capital and how it is Derived
- 4. Critical Analysis of the Sources of Capital
- 5. Conclusion
Objectives and Key Themes
This assignment aims to analyze shareholder wealth maximization as the primary goal for private firms, exploring its relationship with agency theory and the concept of cost of capital. It critically examines the sources of capital and their implications for financial decision-making.
- Shareholder wealth maximization as a corporate objective
- The agency problem and its impact on shareholder value
- The concept and calculation of the cost of capital
- Critical evaluation of different sources of capital
- The implications of financial decisions for shareholder value
Chapter Summaries
1. Approach: This introductory section establishes shareholder wealth maximization as the generally accepted goal in financial management, referencing statements from leading figures like Tesco's CEO. However, it immediately introduces the complexities of this goal, highlighting the agency problem where managers' self-interest might conflict with shareholders' interests. The Hibu case study is presented as a prime example of this conflict, illustrating the consequences of management decisions that prioritized debt over shareholder value. The chapter outlines the assignment's structure, indicating the subsequent examination of cost of capital and sources of capital.
2. Shareholder Wealth Maximization as an Organizational Goal for Private Firms and its Link to the Agency Theory: This section delves into the concept of shareholder wealth maximization, defining it through the market price of shares. While seemingly straightforward for privately owned companies, the chapter emphasizes the complexities arising from multiple stakeholders affected by firm activities. The discussion contrasts shareholder wealth maximization with broader stakeholder considerations, touching on corporate social responsibility (CSR). The central theme is the agency problem, arising from the separation of ownership and control. The chapter uses the Hibu example to illustrate a situation where the agency problem resulted in a dramatic decrease in shareholder value due to management decisions that benefitted creditors more than shareholders. It explores mechanisms for aligning managers' and shareholders' interests, such as stock option plans and monitoring mechanisms.
3. The Concept of Cost of Capital and how it is Derived: This section focuses on the crucial role of minimizing the cost of capital in achieving shareholder wealth maximization. It explains the weighted average cost of capital (WACC) and introduces two methods for calculating the cost of equity capital: the dividend valuation model (DVM) and its adjusted version which accounts for dividend growth. This section lays the groundwork for evaluating financial decisions by providing a framework for understanding and calculating the cost of different financing options.
Keywords
Shareholder wealth maximization, agency theory, cost of capital, weighted average cost of capital (WACC), dividend valuation model (DVM), sources of capital, stakeholder theory, corporate social responsibility (CSR), financial decision-making, Hibu case study.
Frequently Asked Questions: A Comprehensive Language Preview
What is the overall purpose of this document?
This document provides a comprehensive preview of a language learning resource. It includes a table of contents, objectives and key themes, chapter summaries, and keywords. The preview is designed to give a detailed understanding of the content and structure of the full resource.
What topics are covered in this language learning resource?
The resource focuses on shareholder wealth maximization as a primary goal for private firms. It explores the relationship between this goal and agency theory, examines the concept and calculation of the cost of capital, and critically analyzes various sources of capital. The Hibu case study is used to illustrate key concepts.
What are the key objectives of the resource?
The main objectives are to analyze shareholder wealth maximization as a corporate objective, understand the agency problem and its impact on shareholder value, learn how to calculate the cost of capital, critically evaluate different sources of capital, and understand the implications of financial decisions for shareholder value.
What are the key themes explored?
Key themes include shareholder wealth maximization as a corporate objective, the agency problem and its impact on shareholder value, the concept and calculation of the cost of capital (including WACC and DVM), critical evaluation of different sources of capital, and the implications of financial decisions for shareholder value. The role of stakeholders and corporate social responsibility (CSR) is also touched upon.
What is covered in each chapter?
Chapter 1 (Approach): Introduces shareholder wealth maximization as a goal, highlights the agency problem using the Hibu case study, and outlines the assignment's structure. Chapter 2 (Shareholder Wealth Maximization...): Defines shareholder wealth maximization, discusses its complexities in privately owned companies, explores the agency problem in detail, and examines mechanisms for aligning managers' and shareholders' interests. Chapter 3 (The Concept of Cost of Capital...): Focuses on minimizing the cost of capital, explains the weighted average cost of capital (WACC), and introduces methods for calculating the cost of equity capital (DVM).
What is the Hibu case study used for?
The Hibu case study serves as a prime example of the agency problem, illustrating how management decisions prioritizing debt over shareholder value can dramatically decrease shareholder value.
What methods are discussed for calculating the cost of equity capital?
The dividend valuation model (DVM) and its adjusted version, accounting for dividend growth, are discussed as methods for calculating the cost of equity capital.
What keywords are associated with this resource?
Key words include: Shareholder wealth maximization, agency theory, cost of capital, weighted average cost of capital (WACC), dividend valuation model (DVM), sources of capital, stakeholder theory, corporate social responsibility (CSR), financial decision-making, Hibu case study.
Who is the intended audience for this resource?
While not explicitly stated, the detailed financial analysis and academic approach suggest the intended audience is likely students or professionals in finance or related fields.
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- Citar trabajo
- Simon Bergstein (Autor), 2013, Financial Management and the Agency Theory, Múnich, GRIN Verlag, https://www.grin.com/document/270125
