Summary
Summary - international finance management
- Course
- Institution
This summary includes everything from IFM of the second year form chapter 1 until chapter 6.
[Show more]
Seller
Follow
Emmaheylen
Reviews received
Content preview
International Finance ManagmentChapter 1
Risk and return
- Risk refers to the possibility that actual return may be different from expected return.
- Risk can be measured by standard deviation.
- Investors require increasing compensation (return) for taking on increasing risk.
- Return on an investment can be measured over a standard period such as 1 year.
Shareholder return is annual dividend (D1) plus share price increase (P1 – P0).
Relative return in percentage terms is 100 × [(P1 – P0) + D1]/P0.
This is called total shareholder return.
Future value
Present value
Decision making areas
A financial manager’s tasks can be divided into three areas:
- Financing decisions
- Dividend decisions
- Investment decisions
Key point: understand the interrelationship of these three decision areas.
,SHWM= Share Holder Wealth Maximisation
Shareholders want both dividends and capital gains.
Capital gains reflect future dividends.
Current and future dividends depend on future cash flows:
- Their magnitude or size
- Their timing
- Their associated risk
Making big loses but still everyone still expects future dividends
Cash flow= real cash in company
The closer the cash flow gets the better
Link NPV to SHWM
Divergence of Ownership and Control:
= divergence occurs when shareholders own a company, but managers control its day-to-
day operations.
Agency Problem
= The agency problem arises when managers' goals differ from shareholders', creating a
conflict of interest.
Consequences:
1. Shareholder Wealth: may not be maximized due to conflicting objectives.
2. Corporate Governance: becomes crucial to align managerial actions with shareholder
interests.
, Difference between Ownership and Control:
- Shareholders: own the company through shares.
- Management: controls day-to-day operations.
Mitigation:
1. Aligning Incentives: compensation tied to shareholder interests.
2. Transparent Reporting: reducing information asymmetry.
3. Effective Corporate Governance: independent boards and mechanisms to monitor
management.
In essence, the challenge is ensuring that managerial actions align with shareholder interests
to maximize wealth and maintaining effective corporate governance to address the
divergence between ownership and control.
Beyond Shareholders: Agency Problems with Creditors and Employees
Creditors vs. Managers:
- Crisis: differing interests between suppliers and managers.
- Resolution: contracts with clear payment terms to align interests.
Employees vs. Management:
- Challenge: salary-related agency problem.
- Resolution: transparent communication, fair evaluation, and clear salary structures for
harmony.
The consequences of the agency problem
- Managers will follow their own objectives increasing their power, job security and
pay & rewards
- Shareholders need to ensure that their own wealth is maximized
Signs of an agency problem
- Managers mainly finance company with equity finance, accept low risk, short-
payback investment projects, diversify business operations follow ‘pet projects’ and
are rewarded for performance that is ‘below average’.
Solutions to the agency problem
- is to design managerial contracts that minimize the sum of the following costs:
financial contracting, monitoring and divergent behavior (= goal congruence between
shareholders and managers)
- Bpost problem: government is one of the shareholders’, bpost is overcharging rent
and distribution of their shareholders’
Option 1 : do nothing
Option 2: monitoring (= racking and analyzing a business' performance over a certain
period of time)
Option 3: reward good behaviour
- Rewarding is more common than monitoring
The benefits of buying summaries with Stuvia:
Guaranteed quality through customer reviews
Stuvia customers have reviewed more than 700,000 summaries. This how you know that you are buying the best documents.
Quick and easy check-out
You can quickly pay through credit card or Stuvia-credit for the summaries. There is no membership needed.
Focus on what matters
Your fellow students write the study notes themselves, which is why the documents are always reliable and up-to-date. This ensures you quickly get to the core!
Frequently asked questions
What do I get when I buy this document?
You get a PDF, available immediately after your purchase. The purchased document is accessible anytime, anywhere and indefinitely through your profile.
Satisfaction guarantee: how does it work?
Our satisfaction guarantee ensures that you always find a study document that suits you well. You fill out a form, and our customer service team takes care of the rest.
Who am I buying these notes from?
Stuvia is a marketplace, so you are not buying this document from us, but from seller Emmaheylen. Stuvia facilitates payment to the seller.
Will I be stuck with a subscription?
No, you only buy these notes for $16.96. You're not tied to anything after your purchase.
Can Stuvia be trusted?
4.6 stars on Google & Trustpilot (+1000 reviews)
80461 documents were sold in the last 30 days
Founded in 2010, the go-to place to buy study notes for 14 years now