Professional Documents
Culture Documents
Current
Assets
Fixed Assets
1 Tangible
2 Intangible
Shareholders
Equity
Current
Assets
Fixed Assets
1 Tangible
2 Intangible
Long-Term
Debt
What long-term
investments
should the firm
choose?
Shareholders
Equity
Current
Liabilities
Long-Term
Debt
Shareholders
Equity
Capital Structure
The value of the firm can be
thought of as a pie.
The goal of the manager is
to increase the size of the
pie.
The Capital Structure
decision can be viewed as
how best to slice the pie.
70%50%30%
25%
DebtDebt
Equity
75%
50%
Equity
If how you slice the pie affects the size of the pie,
then the capital structure decision matters.
Current assets
Fixed assets
Financial
markets
Short-term debt
Long-term debt
Dividends and
debt payments (E)
Equity shares
Taxes (D)
Cash flow
from firm (C)
Government
Fixed Assets
1 Tangible
2 Intangible
Current
Liabilities
Net
Working
Capital
How should
short-term assets
be managed and
financed?
Long-Term
Debt
Shareholders
Equity
Treasurer
Controller
Cash Manager
Credit Manager
Tax Manager
Cost Accounting
Capital Expenditures
Financial Planning
Financial Accounting
Data Processing
Agency problem
Separation of ownership and management (information
asymmetry)
Agency problem arises when agents (managers) has a conflict of
interest against principals (owners)
It results in sub-optimal behaviour of managers who may have an
incentive (moral hazard) to engage in activities which may
decrease or destroy firm value or limit action on opportunities for
enhancement of firm value
Agency problem results in loss in firm value either due to
suboptimal behaviour manager or due to cost of monitoring born to
control suboptimal behaviour.
Corporate governance
Executive compensation and performance measurement