Corporate finance Essay Example | Topics and Well Written Essays - 5500 words

Corporate pay - Essay ExampleThat means it is the theory between the shareholders & the company managers. This term includes the expense of solving the potential difference conflicts between the two relevant groups. According to this theory, because of incomplete information & uncertainty, two types of problem offer arise. such(prenominal) as-A potential agency problem arises whenever the manager of a unfaltering owns less than 100% of the blind drunks common stocks. However, if the owner-manager incorporates & then sells some of the stocks to the outsiders, a potential conflict of interests immediately arises. In near large listed companies, potential conflicts of interests are important, as those firms managers generally own only a small percentage of the stocks. In this situation, shareholder wealth maximization could take a back fuck to any number of conflicting managerial goals.In addition to the conflict between stockholders & managers, there can also be conflicts betwee n creditors & stockholders. Creditors have a claim on the part of the firms earning stream of payment of interest & principle on the debt, & they have a claim on the firms assets in the event of bankruptcy. Stockholders have a control of decisions that affect the profitability & risk of the firm. Creditors channel the firm on the base of 1) Capital Structure A firms capital coordinate is that mix of debt & equity that maximizes the stock price. At any point of time, management has a specific target capital structure. Capital structure policy involves a trade-off between risk & return- monetary flexibility or the ability to raise capital on reasonable terms under perverse conditions. The greater the probable future need for capital, & the worse the consequences of the capital shortage, the stronger the balance sheet should be.Managerial conservativism or aggressiveness that refers some managers are to a greater extent aggressive than others, hence some firms are more inclined