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Company Agency and Cost of Capital Analysis

How does the firm you work for control its agency problem? In other words, how does your company ensure that your top executives work in the best interest of the firm rather than in their own best interest? How would you change the requirements for your top management's bonus? (I work at a motel as an assistant manager)

Do problem ST2 on page 356. Using your answer to ST2 rounded to the nearest percent, compute the NPV of a project that cost $10,000 and generates $3,000 a year for 4 years.

Study Problem 2
(weighed average cost of capital) The capital structure for the Carion Corporation is provided here. The company plans to maintain its debt structure in the future. If the firm has a 5.5 percent after-tax cost of debt, a 13.5 percent cost of preferred stock, and an 18 percent cost of common stock, what is the firm's weighed average cost of capital?

Capital Structure ($000)
Bonds $1,083
Preferred Stock 268
Common Stock 3,681

Total $5,032

Solution Preview

How does the firm your work for control its agency problem? In other words, how does your company ensure that your top executives work in the best interest of the firm rather than in their own best interest? How would you change the requirements for your top management's bonus? (I work at a motel as an assistant manager)

Shareholders and managers have the principal-agent relationship. In practice, there may arise a conflict between the interests of shareholders and managers. This is referred to the agency problem and the associated costs are called agency costs. Management may not work for maximization of wealth due to following reasons:

1. Lack of ...

Solution Summary

This solution provides calculations in Excel for NPV and average cost of capital.

$2.19