Business finance : theory and practice by Eddie McLaney

By Eddie McLaney

Company Financehas a real-world flavour, exploring the theories surrounding monetary selection making and concerning those theories to what occurs within the genuine international.

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On top of this, most larger businesses grant substantial share options to directors. In this way directors have a strong incentive to benefit the shareholders. Bonuses and share option benefits can easily exceed basic salaries of many directors. So, while some businesses do not state shareholder wealth maximisation as their goal, their actions, including the incentives given to senior managers, strongly imply that the economic welfare of shareholders is a major issue. 3 Conflicts of interests: shareholders versus managers – the ‘agency’ problem The problem Although the shareholders control the business in theory, in practice the managers control it on a day-to-day basis.

Buoyant share prices make businesses unattractive as takeover targets, so that managers have a vested interest in promoting buoyancy, if not maximisation, of share prices. We shall look at takeovers in Chapter 14. Short-termism ‘ The existence of the takeover sanction may not be sufficient to cause management to be completely selfless in its conduct of the business’s affairs, however. One area where the takeover sanction may not be effective is where managers take too short-term a view. Although the best interests of the shareholders may be served by an emphasis on long-term profitability, the best interests of managers could be served by so-called short-termism.

In practice, assets such as commodities (for example, coffee, grain, copper) and financial instruments (for example, shares in companies, loans, foreign currency) are the ones that we tend to encounter as the basis of a derivative. A straightforward example of a derivative is an option to buy or sell a specified asset, on a specified date or within a specified range of dates (the exercise date), for a specified price (the exercise price). For example, a UK exporter who has made a sale in euros, and expects the cash to be received in two months’ time, may buy the option to sell the euros for sterling at a price set now, but where delivery of the euros would not take place until receipt from the customer in two months’ time.

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