Question

FIN220 What is the agency problem, and how might it impact the goal of maximization of shareholder Question 4. wealth? Question 5. What is corporate governance? What role does a corporation's board of directors play in corporate governance? Question 6. What is the time value of money? Why is it so important?

Answer 1

Q4. This agency problem is basically known as "Principal-Agent Conflict". An agent is hired to act in the interest of the principal, but an agent's interests may not coincide exactly with those of the principal. There are various types of agency problems such as:

1. Conflicts of interest between shareholders(principal) and managers/directors(agents).
2. Conflicts between groups of shareholders
3. Conflicts between creditors and shareholders

The agency issues create a conflict of interest and as a result, the agents try to maximize their own profit instead of maximizing the shareholder's wealth with is the ultimate goal of any company. As a result, the shareholders' profit maximization gets hindered.

Q5. Corporate Governance is the system of internal controls and procedures by which individual companies are managed. It provides a framework that defines the rights, rules and responsibilities of various groups within an organization. At its core, corporate governance is the arrangement of checks, balances, and incentives a company needs in order to minimize and manage the conflicting interests between insiders and external stakeholders.

The Board of directors has a responsibility to protect the interests of shareholders to hire, fire and set the compensation of the firm's senior managers, to set the strategic direction of the firm, and to monitor financial performance and other aspects of the firm's ongoing activities.

Q6.Time Value of Money basically means how the value of money changes with time. The concept of compound interest or interest on interest is deeply embedded with TVM.

TVM applications frequently call for determining the future value(FV) of an investment's cash flows as a result of the effects of compound interest.