Corporate finance Essay Example | Topics and Well Written Essays - 5500 words

Corporate finance - Essay ExampleThat means it is the theory in the midst of the shareholders & the company managers. This termination includes the expense of solving the potential disputes between the two relevant groups. According to this theory, because of incomplete information & uncertainty, two types of problem can arise. Such as-A potential agency problem arises whenever the manager of a firm owns less than 100% of the firms common stocks. However, if the owner-manager incorporates & then sells some of the stocks to the outsiders, a potential contravention of interests immediately arises. In most large listed companies, potential conflicts of interests are important, as those firms managers generally own only a small parcel of the stocks. In this situation, shareholder wealth maximization could take a back seat to any number of conflicting managerial goals.In addition to the conflict between stockholders & managers, there can also be conflicts between creditors & stockho lders. Creditors have a claim on the part of the firms earning stream of wages of interest & principle on the debt, & they have a claim on the firms assets in the event of bankruptcy. Stockholders have a control of decisions that ingrain the profitability & risk of the firm. Creditors lend the firm on the base of 1) Capital Structure A firms capital structure is that mix of debt & fair-mindedness that maximizes the stock price. At any point of time, management has a specific target capital structure. Capital structure policy involves a trade-off between risk & return-Financial flexibility or the ability to raise capital on reasonable terms under adverse conditions. The greater the likely future need for capital, & the worse the consequences of the capital shortage, the stronger the balance sheet should be.Managerial conservatism or aggressiveness that refers some managers are more aggressive than others, thence some firms are more inclined