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Part 1
Question 1
Stockholders their main aim is to maximize wealth and we all know business is long-time objective
for companies. Stockholder maximization helps organizations to generate cash for business growth
and also meeting the needs of the individuals in a way which is more effective (Martin,
2018). Wealth maximization is offered competitive advantage towards with its competitors in a
comprehensive manner. Companies make decisions to benefit their businesses and also the
management. However, organizations are likely to be questioned if the decisions they make benefit
their needs only.
Question 2
Compensation packages which are realistic and direct intervention by shareholders are major tools
which are used to align the interest of the stockholders as we all the managers.
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Compensation packages
Enough and relevant compensation packages are important which helps a lot on how to align
management and stockholders’ interests. They attract managers who are capable towards
achieving best of the organization. The compensation packages should be created and well
prepared to enable management reward the long-time achievement.
•
Direct intervention through shareholders
With this tool, stockholders interact with the management directly. Through direct interaction with the
managers, they talk to the management and give their views on how business should be controlled
(Martin, 2018).
Question 3
The tools discussed above have their own benefits in running the business. One of its important
things they do is helping on conflict resolution. As discussed earlier, stockholders are wealthy
maximizers and this act might cause conflict between them and the management. When conflicts
occur, they help to solve the conflict in a manner which is comprehensive to avoid affecting the
progress of the business. Compensation of managers is based on a long-term concept of the stock
available and not the expense of the stock itself (Martens & Berry, 2011).
With help of compensation packages which offer room for compensating managers, high returns will
be achieved at long last. Direct intervention by shareholders also boost benefits of the
organizations. Benefits are gained as result of making critical decisions which benefits everyone
including needs of the individuals. Fulfillment of the desire for everyone rather than management
only leaves stockholders satisfied and this helps to resolve and management of the conflicts.
Part 2
Time value of money
TVM implies that money earned today is more compared to the intrinsic value in future. This is
because of the potential earning capability. Imagine someone is to choose between receiving
$100,000 today or $100,000 in 50 years to come (Martens & Berry, 2011). The best option to opt for
is considering the first option due to the following reasons;
there are zero chances of a risk of receiving cash back that someone has today already.
$100,000 can be exchanged for products and services today because of inflation than $100,000
in 50 years to come.
it’s important to consider opportunity cost. This because the dollar can be invested to start
receiving interest which can give high values in future (Kwon Gee Jung, 2015). The dollar which will
be earned in future will not give any interest until it’s given.
A numerical example though compounding
This about determining money made today and future by moving cash forward with time.
Time
Time 0
Time 1(compounding)
Time 2
Cash
$100,000
$121,000
If $ 100,000 is invested at time 0 with 10% interest rate, it will grow to $121, 000 as shown above at
time 2. The originally invested compounds because the interest has been earned (Fang, 2014).
Discounting
This is about moving back with time.
Time
Time 0
Time 1(discounting)
Time 2
cash
$100,000
$121,000
To solve future value of cash saved today, a compound of invest at the certain interest rate is done.
The discounting problem when solving present value for cash flows in future.
References
Fang, J. (2014). Does Conditional Conservatism Respond to the Ineffectiveness of the Stock Price in
Disciplining Managers? Evidence from the Relation between Conditional Conservatism and Stock
Illiquidity. SSRN Electronic Journal. http://dx.doi.org/10.2139/ssrn.2434402
Kwon Gee Jung. (2015). The Comparative Value Relevance of Accounting Earnings, Book Value,
Net Cash Flows, Operating Income, and Net Operating Cash Flows in Listed Korean Stock
Markets. Korea International Accounting Review, null(62), 165-188.
http://dx.doi.org/10.21073/kiar.2015..62.007
Martens, S., & Berry, T. (2011). The FASBs Concepts Statement On Cash Flows And Present
Value. Journal Of Applied Business Research (JABR), 19(4).
http://dx.doi.org/10.19030/jabr.v19i4.2186
Martin, Y. (2018). Value Creation Mechanics: An Analytical Reduction of Cash Flows and Net
Present Value to Accounting. SSRN Electronic Journal. http://dx.doi.org/10.2139/ssrn.3123550