3. Why does it make sense that the right to residual income and control go together? If theey are separated, how does this affect the value of a claim to residual income? What are the implication for the equity market?
6. â??The whole of the Industrial Revolution in the United Kingdom could have been financed by any one of several existing private fortunes. New industries wereunable to find finance, even at rates exceeding 20%, when land-connected industries (agriculture, mining, brewing and milling) wereable to command large amounts of capital with rates of return at or below zero.â? â?" M. M. Postan
A. Explain how the foregoing quotation describes an example of the free cash flow problem.
B. How does the problem of free chas flow affect the efficiency of the economy?
C. How does the problem of free cash flow affect the adaptability of the economy?
D. Given the difficulty of financing the new industries, an observer might have argued that the United Kingdom was suffering from too little saving and consequently too little investment. Would you agree?
the 3. Why does it make sense that the right to residual income and control go together? If they are separated, how does this affect the value of a claim to residual income? What are the implication for the equity market?
It makes sense that the right to residual income and control go together. The reason is that unless adequate control is exercised the assets and operations that generate residual income may soon decay or be misappropriated. Consider the example of property that generates rent. Unless the property owner who is the recipient of the residual income actually has control over the property, the property may be misused or even break down. .
If the right to residual income and control are separated, the value of the claim to residual income may decline. For instance, when an author is earning royalty and has no control over the process by which royalties are earned in a large number of cases the value of the royalty decreases.
The implication for the equity market is that the shareholders appoint the board of directors. These directors exercise control over the management of the company in several ways. The Board appoints the CEO of the company. It asks for reports and reviews them from time to time; it appoints committees for different matters and also appoints the audit committee. Through these mechanisms ...
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