Looking at Agency Relationship and its Problems

Agency relationship is relationship in which a principal make agreement with an agent to carry out some services on his or her behalf which means the principal delegates the power to the agent. While it must be considered the agent will not always acted in the best interests of the principal, the principal is to bear the costs of monitoring and control agent behavior. In turn, the agent will cause the costs of the bonds in convincing the principal interests of the principal will not be harmful. Agents and may take decisions that do not always maximize the welfare of the principal. Results can be determined from what they experience.

Agency Relationship Problems

Perk Agency Work-related pleasing effect, such as corporate jets, good offices, and others, enhance exchange between incentives and insurance to determine the optimal incentive contract. Perk interest may be offered even if they use direct benefits offset by the costs they. They will be offered for free Agents in more uncertain production environments will receive more perks Senior executives should receive more perks Better corporate governance can lead to more perk spending by CEOs. In analysis, it also offers insights into the firms' decisions about how much independence they should grant to their employees and the provision of optimal perk when managers and workers are organized in teams.

Lack of information

When the principal hired the agent (e.g. a sales or manager) to perform tasks on his behalf, he cannot ensure that the agent will performs them precisely the way the principal would like it to be. The decisions and the performance of the agent are impossible or expensive to monitor and the incentives of the agent may contradict from those of the principal. For example, the agent didn't carry out what the principal would want it to be. The agent carry out the task based on their own decision and differ from what the principal would like it to be carried out. The principal has no idea of what is going on as he is not the one interact directly on the task.

Miscommunication

It happens when one side doesn't convey enough information to us, or we misunderstanding the real meaning of their words. In either case, we get a different meaning of their messages than they intended. With the starting of e-mail and IM chat, this is a becoming a usual problem nowadays because type based communication is asynchronous communication, meaning that people do not communicate in real time. It's in essence a telegram. Asynchronous communication didn't allow for immediate feedback response, so our minds have to read what the other person is saying based upon their typed words alone. Although most common in typed based communication, miscommunication can also occur in any type of communication setting. Another familiar type of miscommunication is no communication or it called lack of communication. Why does all this confusion occur? One of the many reasons is that people suffer from information overload.They simply can't process everything they receive via email - nor do they really want to. As much as you would like them to, recipients of your email messages don't give every message they receive from you their undivided attention.A  In reality, people read email quickly; they do other tasks while they read email (such as talking on the telephone); and they ignore messages altogether.A Even under the best conditions, it's easy for the information you send to become distorted.A  You don't want to complicate matters by sending email messages loaded with technical terms or industry-specific jargon that would require the reader to decipher the language before he/she can even begin to use the data.

Question 1b

Resolved Agency Problem in general

Report Management can be controlled by shareholders in various ways. Annual reports about the company presentations should be presented by the manager to the shareholders. In the report, there will be a financial expression of the earnings for the period and the financial position at the end of the period. The problem for shareholders is that the information they receive, is prepared by managers. To make sure the reasonableness of the information, shareholders employ auditors to express an opinion on the financial statements and to report to them at the company once a year general meeting. The audit fee for this work is a considerable "monitoring cost" borne by the shareholders to make sure that managers are present a right picture of the business presentation. Commission Shareholders, recognising that managers may lack the motivation to maximise shareholders' assets, may incur costs to encourage optimising behaviour by managers. Incentives may be offered to managers by shareholders to improve the shareholder and manager goal congruence. The costs of such incentives are referred to as "bonding costs". This is the cost of tying a manager to an action, which will lead to the maximisation of shareholder wealth. Such incentives can include managers being given rewards, which leads to rising remuneration for them as shareholders' wealth is increased. Agreement In this agreement is amongst shareholder and company are regulated by the legal document of the company. The reasons why the shareholders may wish to add-on (or take over from) the legal documents of the company in this way before the agent become perk, with this the shareholder knows how to manage the company problem. The shareholder gives the company on behalf to agent to run the business. If the agent successes run the business the shareholder give are special for them. Here some example agreement for agency: If the agent successfully runs the business in one year, 30% will be given on the first month salary. Two months salary bonus at the end of the year Allowance of 10% given for every month Free housing for staying and car for 2 years contract working. Scholarship for children and free insurance in case any eject. Twice a year 20% shareholder sponsor holiday package for agent Agent should pay back 1 year agreement to shareholder and any incentives will be withdraw if the agent quit during the term of the agreement. The contract term should include the agent will not has any business agreement with other company.

Question 2

Investment appraisal methods

Investing large capital is only working once sums compensate the costs of investments. Appraisal methods can be dividing into two kinds of ways there are traditional methods and discounted cash flow techniques. Traditional methods include the Average Rate of Return (ARR) and the Payback method; discounted cash flow (DCF) methods use Net Present Value (NPV) and Internal Rate of Return techniques.

Traditional Methods

Payback Accurately amount of time required for the cash inflows from a capital investment project to equal the cash outflows. Normally firms deal with deciding between two or more competing projects is to accept the project that has the shortest payback period. Payback is often used as an initial screening method. Payback period = Initial payment / Annual cash inflow So, if BND4 millions is invested with the aim of earning BND500 000 per year (net cash earnings), the payback period is calculated will be: P = BND4 000 000 / BND500 000 = 8 years To workout of period on the cumulative cash flow has to calculate the whole over of the duration project.

Payback with uneven cash flows:

In the real world, investment projects by business organizations don't give way even cash flows. The payback period is precisely 5 years. The shorter the payback period, the better for the investment. Sacrifice is the only way to wait for receive the funds as in economic is always change due to world crisis. Sometimes the payback method can be more complicated as there is limited time were given. In this case, the earlier flow of income is a key factor. Also if post-payback revenues occur earlier in the lives of competing projects, that can be critical. Arguments in favor of payback Firstly, research over the years has shown that Brunei firms favor it and perhaps this is understandable given how easy it is to calculate. Secondly, in a business environment of rapid technological change, new plant and machinery may need to be replaced sooner than in the past, so a quick payback on investment is essential. Thirdly, the investment oil and gas in the Brunei in particular, demands that investors are rewarded with fast returns. Profitable opportunities for long-term investment are overlooked because they involve a longer wait for revenues to flow. Arguments against payback Cash flows are regarded as either pre-payback or post-payback, but the latter tend to be ignored. Payback takes no account of the effect on business profitability. Its sole concern is cash flow. Average Rate of Return: The average rate of return expresses the profits arising from a project as a percentage of the initial capital cost. For instance, the profits may be taken to include reduce of the profits or they may not. Here the formula of AAR below: ARR = (Average annual revenue / Initial capital costs) x 100 The simple example to demonstrate the ARR: A project to replace an item of machinery is being appraised. The machine will cost BND240,000 and is expected to generate total revenues of BND45,000 over the project's five year life. What is the ARR for this project? ARR = (BND45, 000 / 5) / 240, 000 x 100 = (BND9 000) / 240, 000 x 100 = 3.75% Advantages of ARR The Average Rate of Return is similar to the Return on Capital Employed in its construction. The ARR is expressed in percentage terms. Arguments against ARR The ARR doesn't take account of the project duration or the timing of cash flows over the course of the project. The concept of profit can be very subjective, varying with specific accounting practice and the capitalization of project costs. As a result, the ARR calculation for identical projects would be likely to result in different outcomes from business to business. As there is no definitive signal given by the ARR to help managers decide whether or not to invest. This lack of a guide for decision making means that investment decisions remain subjective.

Cite this page