By Eddie McLaney
Enterprise Financehas a real-world flavour, exploring the theories surrounding monetary selection making and pertaining to those theories to what occurs within the actual international.
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Additional resources for Business Finance: Theory and Practice, 8th Edition
This is because managers act as agents of the shareholders in the management of the assets of the business. Agency cost is a factor that arises in several areas of business ﬁnance. Of course, bonuses linked to shareholder returns and directors’ share options, which we discussed on page 26, are examples of agency costs incurred to encourage the managers to run the business in a shareholder-wealthenhancing manner. We shall look at other areas where agency is a potential problem, in various contexts, later in the book.
2 Returns from investments are known with certainty: for example, there is no doubt that if Project X is undertaken, £120,000 will ﬂow in next year. 3 All individuals prefer more wealth to less. 4 Borrowing and lending rates are equal as between one another, and as between individuals and businesses. Clearly, some of these assumptions are unrealistic, particularly the ﬁrst two. Whether this seriously weakens the separation theorem and its implications is probably impossible to assess directly. Even if the theorem does not strictly hold true in practice, it does give some insights about the relationship between shareholders and managers in the context of investment productive assets, as well as into how those investments might be ﬁnanced.
If this is the case, the ﬁnal decision may need to be a compromise. 4 Financing, investment and separation If we accept that businesses should seek to maximise the wealth of the shareholders in making their ﬁnancial decisions, we can now turn our attention to how, in theory at least, managers should approach their decision making so as to promote this objective. Let us do this by consideration of an example. 2 Project X – to invest or to spend Industries Ltd is a business owned by a number of independently minded shareholders.