TUTORIAL 1 BUSINESS PLANNING & FINANCIAL PLANNING
1. Candidate should explain that a stockholder owns part of a company and is entitled to income in the form of dividends. Stockholders also elect directors who run the company. Stakeholders are groups of people who have an interest in how the firm is run. These include stockholders, employees, management, creditors and customers among others. Each group is interested in the firm’s operation and profitability for its own reasons. All stockholders are stakeholders, but not all stakeholders are stockholders.
2. The two common sources of corporate financing are stocks (shares) and bonds. Shareholders are the owner of the firm in which they are entitled to dividend if firms generate profit. Bondholders are creditors to a firm. They receive fixed coupon payment (annually or semi-annually) until maturity of the bond plus principle at maturity.
3. Symmetric Information is a situation in which investors and managers have identical information about firms’ prospects. Asymmetric information is a situation in which managers have different
(better) information about firms’ prospects than do investors.
4. The relationship between stockholders and the management is called the agency relationship.
This occurs when the shareholders as principals hire their agents to act on their behalf. The possibility of conflicts of interest between them is termed as the agency problem. There are two types of agency costs, the direct costs originating from compensation and the indirect ones resulting from monitoring the agent’s performance. Hence, shareholders should make efforts to affect managerial behaviour in order to minimize agency cost by practicing a reward system known as executive compensation tied to performance.
5. Generally there are two ways of seeking to optimise managerial behaviour in order to encourage goal congruence between