Principal Agent Model Notes
Economic model of relationships in a firm
Principals are managers or firm owners
Agents are employees or independent contractors
Agents perform functions for principals
Numerous principal-agent relationshi
Correlation Coefficient Notes
Can we quantify how much two assets move in lock step with each other?
The correlation coefficient is a measure of the degree to
which any two variables move together.
The correlation coefficient is always a number between -1
Accountings Role in the Organizations Architecture Notes
Accounting reports are more useful for control (ratifying and monitoring)
than for decision management (initiation and implementation). [Recall
Decision management requires forward-looki
Markets versus Firms Notes
Decision rights are restrictions on how economic assets of a firm can or
cannot be used.
Management determines how decision rights are to be allocated among
various agents within a firm.
Alternative styles of all
Market Risk vs Unique Risk Notes
You will find that if you are holding only one stock, then you will
be exposed to 100% of the risk of that stocks price changes.
If you hold two stocks with a correlation coefficient less than 1,
then the risk of the portf
Measuring Risk Notes
Which of the following two investments is riskier?
Investment A has an average annual return of 8%, with a range
Investment B also has an average annual return of 8%, but with
a range of 12%.
Returns vary from 4% to 20% in any
Rates of Return Notes
Measuring Rate of Return
The returns on an investment come in two forms:
Income (dividend or interest payments).
Capital gains (or losses).
You have learned how to measure the total rate of return on an
The Role of
Financial Management Notes
What is Financial Management?
The Goal of the Firm
Organization of the Financial Management Function
What is Financial Management?
Concerns the acquisition, financing, and management of assets wi
Risk and Diversification Notes
If you look at Table 10.6 on page 319, you will see the standard
deviation for some representative Canadian common stocks.
Do the standard deviations look high to you?
The market portfolios standard deviation
The Modern Corporation Notes
Role of Management
Management acts as an agent for the owners (shareholders) of the firm.
An agent is an individual authorized by another person, called
the principal, to act in the latters behalf.
Jensen and Mec
Self-interested Behavior Notes
Fundamental assumption of economics:
Individuals act in their own self-interest to maximize utility.
work for employer, work on other projects, relax, etc.
time, money, knowledge, etc.
Organization of the Financial Management Function Notes
Board of Directors
Set company-wide policy;
Advise the CEO and other senior executives;
Hire, fire, and set the compensation of the CEO;
Review and approve strategy, signifi
Alternative Perspective Notes
Shortcomings of Alternative Perspectives
Maximizing a firms earnings after taxes.
Could increase current profits while harming firm (e.g., defer
maintenance, issue common stock to buy T-bills, etc