Reference no: EM132955979

ACC501 Business Accounting And Finance

Assignment 1

Question 1 In the world of corporate finance, the key objective of the firm is often considered to be shareholder wealth maximization.
Required:

(a) Evaluate the reasons for selecting shareholder wealth maximisation rather than profit maximisation as the key objective of the firm.

(b) What is meant by the term ‘agency theory'? Critically comment on how it manifests itself in a business and how it may be alleviated.

Question 2

Triglass plc has three types of capital. The market capitalization of its equity is $20 million. These ordinary shares have a beta of 0.9, as measure over the past five years of monthly returns which may be taken as the appropriate adjustment to the average risk premium. The current risk-free rate on government bonds is 4.5%. The historical equity risk premium is 5% per year. The market value of its irredeemable non-participating non-convertible preference shares is $5 million and the rate of return being offered is 7.5% per year. The debt of the firm amounts to $15 million and costs 6.5% per year before allowing for tax shield benefits. The corporation tax rate is 30%. Calculate the WACC for Triglass plc.

Question 3

Investment is inherently risky; however, the wise investor will seek ways to reduce this risk. One such method is to utilise portfolio theory when planning the investments.

Explain and discuss the concepts behind portfolio theory, clearly identifying any advantages and disadvantages or limitations to this theory.

Question 4

"Stock option grants are good because they motivate executives to act in the best interests of shareholders." Viewpoint A.

"Granting stock options to executives is like allowing a professional footballer to bet on the outcome of games." Viewpoint B.

Discuss the 2 viewpoints.