Question

Please answer the following questions based on your own understandings:

(1) How many types of decisions one corporation needs to make? Could you please show two examples for each type?

(2) What are the functions of financial managers? Ideally, could one person both be a controller and a treasurer? Why?

(3) What is agency cost? How could we reduce this cost? Please show at least two ways and illustrate how they work in detail.

(4) What is the goal of the corporation? Is it desirable for managers to act in the narrow, selfish interest of their shareholders?

Answer 1

ANSWER(1)

Linear Model of Decision Making

Linear decision making involves listing positive and negative factors of each decision alternative. If you’ve ever made a list of pros and cons around a certain decision, then you’ve embarked on linear decision making.

In order for it truly to be linear decision making, the decision maker must then assign a numerical “weight” to each of his pros and cons, and arrive at a total score for each side. For instance, let’s say you were trying to decide if you should or should not hire a very experienced but very expensive candidate for a position in your office. Your linear decision making model might look like this:

Reasons to Hire Candidate	Reasons to Not Hire Candidate
Very experienced in an area where it’s difficult to find experience	3	Another candidate might be able to be hired cheaply and trained	–2
Would not lose as much productivity because candidate has experience	3	Wouldn’t be promoting from within but rather hiring from outside	–3
Candidate would be a good fit with the group culturally speaking	1	Candidate has done some job hopping recently	–3
Searching for another qualified candidate, even if he has to be trained, may take a while.	2	Did not impress all the managers that interviewed him.	–3
Total	9	Total	–11

You’ve assigned the most important reasons a 3 on the positive side, and a –3 for the most important reason on the negative side. This makes it easy for you to tally up both sides and add them together. A positive score suggests you should hire the candidate, and a negative score suggests you should not. Looks like you’re not hiring this candidate!

Intuitive Decision Making

Intuitive decision making is a model that assumes managers make decisions by relying on past experience and their personal assessment of a situation. This model of decision making is often used when there are high levels of uncertainty or complexity around a particular problem, or when the decision is novel and the managers don’t have past experience with this kind of problem.

FOR EXAMPLE-If managers are faced with uncertain, complex situations and they can’t get the right information to make a good decision quickly, they are apt to rely on hunches and intuition. Given the choice between this model and a linear model (like the one discussed above), managers should reach for the linear model.

ANSWER 2

Financial managers perform data analysis and advise senior managers on profit-maximizing ideas. Financial managers are responsible for the financial health of an organization. They produce financial reports, direct investment activities, and develop strategies and plans for the long-term financial goals of their organization. Financial managers typically:

• Prepare financial statements, business activity reports, and forecasts,
• Monitor financial details to ensure that legal requirements are met,
• Supervise employees who do financial reporting and budgeting,
• Review company financial reports and seek ways to reduce costs,
• Analyze market trends to find opportunities for expansion or for acquiring other companies,
• Help management make financial decisions

Every company does not have a treasurer and controller. Generally the controller and corporate treaurer functions are differentiated only in larger organizations, although both of them generally report to the chief financial officer.

ANSWER (3)

What Are Agency Costs?

An agency cost is a type of internal company expense which comes from the actions of an agent acting on behalf of a principal. Agency costs typically arise in the wake of core inefficiencies, dissatisfactions and disruptions, such as conflicts of interest between shareholders and management. Payment of the agency cost is to the acting agent.

REDUCTION IN COST

These costs mainly refer to economic incentives such as performance bonuses, stock options and other carrots which would stimulate agents to execute their duties properly. The agent's purpose is to help a company thrive, thereby aligning the interests of all stakeholders.cost could be reduced by not paying dividends to shareholders etc

1.Incentivizing Employees

If agents are acting in accordance with their own interests, changing incentives to redirect these interests may be beneficial for principals. For example, establishing incentives for achieving sales quotas may result in more salespeople reaching daily sales goals. If the only incentive available to salespeople is hourly pay, employees may have an incentive for discouraging sales. Creating incentives that encourage hard work on projects benefiting the company generally encourages more employees to act in the business's best interest. By aligning agent and principal goals, agency theory attempts to bridge the divide between employees and employers created by the principal-agent problem.

2.Economic Calculation and Competition

Ultimately, individual corporate management is disciplined by other competitive managers. All management competes for shareholder equity, and shareholders who feel the loss of mismanagement have an incentive to switch ownership toward better management.

Agency theory has only recently come to recognize the role of dynamic capital and money markets in solving agency problems. Inefficiencies in corporate operations create a form of arbitrage opportunity for entrepreneurs, through reputation-creating organizations or takeovers, to move capital toward better management.

ANSWER 4

The primary goal of corporations and businesses is to generate profits. Increasingly, corporate executives and business owners are identifying ways in which their philanthropic contributions can help them meet financial goals.

It is not desirable for managers to work in a narrow manner he should make all the stakeholders happy including employees ,creditors, suppliers , agents therefore management should worok on holistic management