Actions of shareholders in agency conflict, Finance Basics

Assignment Help:

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.

 


Related Discussions:- Actions of shareholders in agency conflict

Mortgages - financial institutions, Mortgages - Financial Institutions ...

Mortgages - Financial Institutions An arrangement of the property being purchased provides the security for funding. Other assets may be employed like security for funding o

P/E ratio, How are earnings calculated for the Pe ratio?

How are earnings calculated for the Pe ratio?

Assiogment, Ask question #MinimQuestion You are the financial accountant ...

Ask question #MinimQuestion You are the financial accountant of Donald Bhd, a manufacturer and wholesaler of soft drinks. Donald Bhd is in direct competition with Fizz Bhd and Po

Broker - stock market, Broker - Stock Market 1. A dealer on the ...

Broker - Stock Market 1. A dealer on the market who that sells and buys securities on behalf of the public investors. 2. And he is an agent of investors 3. He is t

Dow Theory, Dow theory elliot wave theory

Dow theory elliot wave theory

Measuring business performance, Measuring Business Performance Defini...

Measuring Business Performance Definition Financial analysis is a process via that finance identifies the company's financial performances with comparing the entities in

Concepts in accounting, J inherited 30000 & decides to open a hair salon.ma...

J inherited 30000 & decides to open a hair salon.make arrangements 1/4/1016 commits 10000 to the business Opens an a/c under j hair salon What will be the amount under capital in

Determine what is the current market price of the bond, 1.  A company is tr...

1.  A company is trying to decide which one of two projects it should accept. Both projects have similar start-up costs. Project 1 will generate annual cash flows of $52,000 a year

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd