d The role of management and agency theory Agency theory used to describe the

D the role of management and agency theory agency

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(d) The role of management and agency theory Agency theory used to describe the relationship between the various interested parties in a firm and can help to explain the various duties and conflicts that occur: Agency relationships occur when one party, the principal, employs another party, the agent, to perform a task on their behalf.
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___________________________________________________________________________________________________________________ Page 7 of 21 IPK COLLEGE 1664, JALAN KULIM, 14202 BUKIT MERTAJAM, PENANG TEL : 012-5203212 / 0125113212 / 04-5512588 Subject: Financial Management (DFM1) Prepared by Susan Lim Email : [email protected] Part 3: Measuring the achievement of corporate objectives Measuring financial performance 1. The primary objectives for a company has been identified as the maximisation of shareholder wealth. However, in the short-term the management may set profitability targets (either as interim-goals or because they better represent the concerns of the managers). 2. The managers of the company will know the performance of the company through ration analysis in which concerned with comparing and quantifying relationship between financial variables in the statement of comprehensive income and statement of financial position. 3. The ratio analysis can be grouped into following FOUR categories: Profitability and return Debt and gearing Liquidity Shareholders’ investment ratios (‘stock market ratios’) 4. The rational of ratio analysis is compare (compare over a number of periods within the same business to establish whether the business is improving or declining and comparison ratios between similar business in which whether the company is better or worse within its own business sectors. Performance measurement is a part of the system of financial control of an enterprise as well as being important to investors.
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___________________________________________________________________________________________________________________ Page 8 of 21 IPK COLLEGE 1664, JALAN KULIM, 14202 BUKIT MERTAJAM, PENANG TEL : 012-5203212 / 0125113212 / 04-5512588 Subject: Financial Management (DFM1) Prepared by Susan Lim Email : [email protected] 5. The Du Pont system of ratio analysis involves constructing a pyramid of interrelated ratios as below: 6. Such ratio pyramids help in providing for an overall management plan to achieve profitability, and allow the interrelationships between ratios to be checked. Profitability and return A company of course to be profitable if it is to maximise shareholder wealth, and it will check on profit whether has been made on ordinary course of activities and compare the current year profit and previous year profit. Profit before taxation will generally use than profit after taxation because there might be unusual variations in the tax charge from year to year which would not affect the underlying profitability of the company’s operations. Profit before interest and tax should be considered. This is the amount of profit which the company earned before having to pay interest to the providers of loan capital. By providers of loan capital, usually longer term loan capital, e.g. debentures and medium-term bank loans.
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  • Spring '17
  • JANE KDAL

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