Reference no: EM133120079

The objective of firms is to maximise the shareholders' wealth. Thus, firm's top management should make the best decisions for its financing and investing to create value in the shareholders' interests. As a finance manager, you are tasked by the Chief Executive Officer (CEO) to draft a comprehensive corporate finance blue print for 2025. Specifically, you would help the company achieve the goals in the following areas pertaining to corporate finance. Required:

(a) Agency theory suggests the conflict of interests between management and shareholders resulting from the separation of management and ownership. Which type of firms, in terms of ownership (or shareholding) structure, would have higher agency problem, and how you would mitigate this problem?

(b) Both financing and investing decisions made by the firm contain new information about firm value perceived by the investors. Thus, stock price reacts positively or negatively to the good or bad news, respectively. List two decisions each for financing and investing made by firms, and how the stock price reactions, i.e. increase or decrease, to the respective decisions.

(c) Your company has accumulated substantial cash flows generated from its investment projects, and the board of directors would like to distribute the cash flows to the shareholders. Discuss the methods and its advantages that the firm could distribute its cash flows to the shareholders.

(d) Firms have financing needs during good and bad market conditions/economies. Thus, firms could issue bond or shares to raise the capital for their financing. Discuss debt or equity financing that firms would consider during good and bad times for its investments. Justify your answers.