Actions of shareholders in agency conflict, Finance Basics

Actions of Shareholders in Agency Conflict

a) Disposal of assets required like collateral for the debt in this.

In this case the bondholder is exposed to more risk because he may not recover the loan extended in case of liquidation of the firm.

b) Assets or investment substitution

However, the bond holders and shareholders will agree on a specific low risk project.  Conversely, this project may be substituted along with a high risk project whose such cash flows have high standard deviation. This exposes the bondholders since should the project collapse, so they may not recover money advanced' the entire amount.

c) Payment of High Dividends

Dividends could be paid from recent net profit and the existing retained earnings. Retained earnings are an internal basis of finance.  The payment of high dividends will lead to low level of investment and capital so reduction in the market value of the bonds and the shares.

A firm may borrow debt capital to finance the payment too of dividends from that no returns are expected. Hence this will reduce the value of the bond and firm.

d) Under investment

This is whereas the firm fails to within a particular project or fails to invest money or capital in the whole project whether there is expectation such most of the returns from the project will advantageous the bondholders. This will guide to reduction in the value of the firm and consequently the value of the bonds.

e) Borrowing more debt capital

A firm may borrow more debt requiring the same asset as collateral for the new debt. The value of old bond or debt will be reduced whether the new debt gets a main concern on the collateral in case the firm is liquidated. These representation the first bondholders or lenders to more risk.


Posted Date: 1/29/2013 1:45:58 AM | Location : United States

Related Discussions:- Actions of shareholders in agency conflict, Assignment Help, Ask Question on Actions of shareholders in agency conflict, Get Answer, Expert's Help, Actions of shareholders in agency conflict Discussions

Write discussion on Actions of shareholders in agency conflict
Your posts are moderated
Related Questions
what is the applicability of a financial cycle to poultry?

Cash Management Techniques The basic strategies that must be employed via the business firm in managing its cash are as: i) To pay account payables as behind as possible wi

Shareholders and Management There is near separation of ownership and management of the firm. Landlord employs professionals as managers who such have technical skills. Manage

Before purchasing insurance we have to go through different factors. Among different important factors there are two most crucial aspects we should consider before buying insurance

Question 1: a) What is dependency ratio and why is it important for pensions? b) For which types of schemes is dependency ratio mostly relevant? Explain c) What is the

1. Find the price of the following bonds. They are all risk-free, and the risk-free rate is 10%. (a) A fifteen-year zero coupon bond with face value $1,000. (b) A three year

A bondholder buys a bond maturing in two years for Rs. 120 and earns Rs.15 per annum as interest. His YTM is ______ %.

Stock Market Index Definition of Stock Market Index An index is a numerical figure that measures relative change in variables between two type of durations. Examples

One of the projects the US loan would fund is to build earthquake-resistant buildings. The project will begin in March 2013, last for two years and is expected to have the followin