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Exercises in Financial Management

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  1. There is a conflict of interest between stockholders and managers. In practice, why might disciplinary mechanisms not work?
  2. If you can invest your money at 8%, how much would you expect to have at the end of the fifteenth year?
  3. What is the value of stock in a company that currently pays out $1.00 per share in dividends, and expects these dividends to grow 15% a year for the next 5 years, and 6% a year forever after that?

In theory, managers should operate in the best interests of the owners, who are the stockholders within corporations. But currently, we can note that stockholders and managers do not have the same interests in the company. This is why, in practice, managers are operating in a different way that the one should be adopted by stockholders. As said by Jensen and Meckling, managers will make optimal decisions for stockholders only if appropriate incentives are given (like stock options for example). If we want that managers manage in the best way for stockholders, there is a need of managerial compensation, a direct shareholders intervention can be used and the threat of dismissal or acquisitions can be initiated in the company. Managers will thus have some common interests with stockholders.

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