1 - FINA312 / FINA517 SEMESTER B 2010 TUTORIAL SESSION 01...

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FINA312 / FINA517 – SEMESTER B 2010 TUTORIAL – SESSION 01 CHAPTER 01 1. Discuss the agency problem. Managers are the agents of the shareholders, and should act on their behalf to maximize shareholder wealth (the value of the stock). A conflict (the agency conflict) arises when managers take self-interested actions to the detriment of shareholders. The roles of the board of directors selected by the shareholders are to oversee management and to minimize agency problems. However, often these boards are figureheads, and individual shareholders do not own large enough blocks of the shares to override management actions. One potential resolution of an agency problem occurs when inefficient management actions cause the price of the stock to be depressed. The firm may then become a takeover target. If the acquisition is successful, managers may be replaced and potentially, stockholders benefit. 2. Discuss the similarities and differences between real and financial assets. Real assets represent the productive capacity of the firm, and appear as assets on the firm's balance sheet. Financial assets are claims against the firm, and thus appear as liabilities on the firm's balance sheet. On the other hand, financial assets are listed on the asset side of the balance sheet of the individuals who own them. Thus, when financial statements are aggregated across the economy, the financial assets cancel out, leaving only the real assets, which directly contribute to the productive capacity of the economy. Financial assets contribute indirectly only. 3. Discuss the following ongoing trends as they relate to the field of investments: globalization, financial engineering, securitization, and computer networks. Globalization offers a wider array of investment choices than what would be available to investors who could only choose domestic securities. As efficient communication technology has become available, globalization of markets has been significantly enhanced. There are many mechanisms by which one country's investors can hold foreign companies' securities. Some examples are ADRs, WEBS, and direct purchase of foreign securities. Securitization refers to aggregating underlying financial assets,
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This note was uploaded on 05/26/2011 for the course FINA 312 taught by Professor 1111 during the Spring '09 term at Waikato.

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1 - FINA312 / FINA517 SEMESTER B 2010 TUTORIAL SESSION 01...

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