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Unformatted text preview: by increasing the value of the company's stock.
Although other potential objectives (survive, maximize market share, maximize profits, etc.) exist these
are consistent with maximizing shareholder value.
Most large corporations are characterized by separation of ownership and control. Separation of
ownership and control occurs when shareholders not actively are involved in the management. The
separation of ownership and control has the advantage that it allows share ownership to change without
influencing with the day-to-day business. The disadvantage of separation of ownership and control is the
agency problem, which incurs agency costs.
Agency costs are incurred when:
1. Managers do not maximize shareholder value
2. Shareholders monitor the management
In firms without separation of ownership and control (i.e. when shareholders are managers) no agency
costs are incurred.
In a corporation the financial manager is responsible for two basic decisions:
1. The investment decision
2. The financing decision
The investment decision is what real assets to invest in, whereas the financing decision deals...
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- Spring '12