Page 365 - Corporate Finance PDF Final new link

BRILLIANT’S Capital Structure Theories 365

 Increasing investor ratios such as dividend  ~‹T>m hþAm {ZdoeH$ aoemo O¡go {H$ {S>{dS>|S> na eo¶a
per share (DPS), dividend cover, dividend (DPS), {S>{dS>|S> H$da, {S>{dS>|S> ¶rëS>, àmBg-A{ZªJ
yield, price-earning (P/E) ratio (P/E) aoemo&
 Others may include the company  Aݶ ‘| H$§nZr Ûmam BgHo$ H$m°nm}aoQ> VWm gm‘m{OH$
improving its corporate and social Xm{¶Ëd H$mo gwYmaZm gpå‘{bV hmo gH$Vm h¡&
responsibilities
Management interest may include: ‘¡ZoO‘|Q> H$s ê${M ‘| gpå‘{bV hmo gH$Vo h¢…
 Managing the firm to achieve its objectives.  BgHo$ CÔoí¶m| H$mo àmá H$aZo Ho$ {bE g§ñWm H$m à~§Y&

 Increasing the wealth and size of the  H§$nZr H$s J{V{d{Y¶m| H$m {dñVma H$aHo$ H§$nZr H$s
company, by expanding the company's g§n{Îm VWm AmH$ma ~‹T>mZm, H§$nZr H$m AmH$ma {OVZm
activities, the bigger the size of the ~‹S>m hmoVm h¡ do CVZm AÀN>m à~§Y H$aVo h¢ {Ogo do
company they manage, the better they are
perceived to be. AZw^d H$aVo h¢&
 Increasing their personal wealth by  ñd¶§ Ho$ A{YH$ doVZ H$m ^wJVmZ VWm Aݶ bm^
paying themselves high remunerations XoH$a {ZOr g§n{Îm ~‹T>mVo h¢&
and other benefits NPP
Costs of Shareholder-Management eo¶ahmoëS>a-‘¡ZoO‘|Q> {ddmX H$s bmJV
Conflict

Agency costs are defined as those costs EO|gr H$s bmJV| n[a^m{fV H$s OmVr h¢ ³¶m|{H$ do bmJV|
borne by shareholders to encourage managers eo¶ahmoëS>a H$s g§n{Îm H$mo A{YH$V‘ H$aZo Ho$ {bE ‘¡ZoOg© H$mo
to maximize shareholder's wealth rather than àmoËgmhZ XoZo ‘| eo¶ahmoëS>g© Ûmam dhZ H$s OmVr h¡§ Z {H$ CZHo$
behave in their own self-interests. ñd¶§ Ho$ goë’$-B§Q>aoñQ> ‘| ì¶dhma H$aZo Ho$ {bE&
There are three major types of agency costs: EO|gr bmJVm| Ho$ VrZ ‘w»¶ àH$ma h¢…
1. Expenditures to monitor managerial 1. ‘¡ZoOo[a¶b J{V{d{Y¶m| Ho$ {ZarjU Ho$ {bE 춶 O¡go
activities, such as audit costs; {H$ Am°{S>Q> bmJV|;
2. Expenditures to structure the organi- 2. Am°J}ZmBOoeZ Ho$ ñQ´>³Ma Ho$ {bE Bg àH$ma go 춶
zation in a way that will limit undesirable
Omo Adm§{N>V ‘¡ZoO[a¶b ì¶dhma H$mo gr{‘V H$aoJm
managerial behaviour, such as appointing
O¡go {H$ ~moS>© Am°’$ S>m¶ao³Q>g© ‘| ~mhar gXñ¶ H$s
outside members to the board of directors
or restructuring the company's business {Z¶w{³V ¶m H§$nZr H$s ì¶mnma BH$mB¶m| VWm ‘¡ZoO‘|Q>
units and management hierarchy; and hmBamH$s© H$s [añQ´>³M[a¨J VWm
3. Opportunity costs which are incurred 3. Anm°Mw©{ZQ>r H$m°ñQ²>g Omo eo¶ahmoëS>a Ûmam à{V~§Y bJmZo
when shareholder-imposed restrictions, na K{Q>V hmoVr h¢ O¡go {H$ {d{eï> ‘wÔm| na eo¶ahmoëS>a
such as requirements for shareholder votes
dmoQ²>g H$s Amdí¶H$Vm, H$m¶©dmhr H$aZo H$s ‘¡ZoOg©
on specific issues, limit the ability of H$s ¶mo½¶Vm gr{‘V H$aZm Omo eo¶a hmoëS>a H$s g§n{Îm
managers to take actions that advance
shareholders wealth. AmJo ~‹T>mVm h¡&