- 20 Marks
FM – MAY 2018 – L2 – Q1 – Economic and regulatory environment
Discusses the effects of high interest rates on the economy, explores the agency problem, and explains why share price maximization is preferred to sales maximization.
Question
a) Economist has always maintained that to increase inflation, the government ought to implement a policy of high interest rate to dampen demand.
Required:
Identify the effects on the economy of a policy of high interest rate on expenditure and investments.
b) Agency problem is pervasive and exists in practically every organization whether a business, church, club, or government. Organizations try to solve it by instituting measures but no organization can remedy it completely.
Required:
i) What is the agency problem within the context of a limited liability company?
ii) Explain TWO causes of the agency problem.
(2 marks)
iii) Explain FOUR remedies to the agency problem.
(4 marks)
c) For a business, it is not necessary that profit should be the only objective; it may concentrate on various aspects such as maximization of share price, maximization of sales, capturing more market shares, return on capital employed among others, which will take care of profitability.
Required:
Explain why maximization of a company’s share price is preferred as a financial objective to maximization of its sales.
(6 marks)
Find Related Questions by Tags, levels, etc.
- Tags: Agency Problem, Interest rates, Share Price Maximization
- Level: Level 2
- Topic: Economic and regulatory environment
- Series: MAY 2018