Please provide current references 1. AGENCY PROBLEMS Who owns a corporation? Describe the process whereby the owners control the firm's management. Describe the main reason why an agency relationship exists in the corporate form of organization. In this context, describe the types of problems that can arise. 2. ENTERPRISE VALUE A firm's enterprise value is equal to the market value of its debt and equity, less the firm's holdings of cash and cash equivalents. This figure is particularly of interest to potential purchasers of the firm. Why? 3. CURRENT RATIO Explain what it means for a firm to have a current ratio of .50. Would the firm be better off with a current ratio of 1.50? What if it were 15.0 ? Explain your answers. 4. PEER GROUP ANALYSIS As a financial manager, how might you use the results of peer group analysis to evaluate the performance of your firm? How is a peer group different from an aspirant group?

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# 1. Agency Problems

**Who owns a corporation?**  
Owners of a corporation are the shareholders who hold equity. They are the residual claimants on the firm’s cash flows and profits.

**How do owners control the firm's management?**  
Shareholders exercise control over management primarily by:
- Electing a board of directors who set overall strategy and hire (or fire) top management.
- Voting on major corporate decisions during annual general meetings or special meetings.
- Using proxies and other mechanisms to influence corporate policies.

**Why does an agency relationship exist in the corporate form?**  
An agency relationship arises because the shareholders (principals) employ managers (agents) to run the firm. Since the managers do not always have the same objectives as the shareholders, conflicts of interest can occur. This separation of control leads to:
- **Information Asymmetry:** Managers typically have better and more timely information about the firm than shareholders.
- **Moral Hazard:** Managers may take actions that enhance their personal benefits (e.g., excessive risk-taking, empire building) rather than maximizing shareholders’ wealth.
- **Monitoring Costs:** Shareholders must incur costs to monitor management and design incentive schemes to align interests.

**References:**  
- Jensen, M. C., & Meckling, W. H. (1976). "Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure."  
- Eisenhardt, K. M. (1989). "Agency Theory: An Assessment and Review." Academy of Management Review, 14(1), 57–74.

# 2. Enterprise Value

**Definition:**  
The enterprise value (EV) is defined as:
$$
\text{EV} = \text{Market Value of Equity} + \text{Market Value of Debt} - \text{Cash and Cash Equivalents}
$$

**Why is EV of particular interest to potential purchasers?**  
- **True Acquisition Cost:** EV represents the net cost to acquire the company, since the acquirer can use the target firm’s cash to help finance the purchase.
- **Capital Structure Neutrality:** Unlike market capitalization, EV incorporates both debt and equity, offering a more complete picture of the firm’s value independent of how it is financed.
- **Comparison Across Firms:** It facilitates more meaningful comparisons between companies with different capital structures.

**Reference:**  
- Damodaran, A. (2012). "Investment Valuation: Tools and Techniques for Determining the Value of Any Asset."

# 3. Current Ratio

The current ratio is given by:
$$
\text{Current Ratio} = \frac{\text{Current Assets}}{\text{Current Liabilities}}
$$

**Interpretation of a current ratio of 0.50:**  
- This means that for every dollar of current liabilities, the firm only has 50 cents in current assets.
- It suggests that the firm might struggle to meet its short-term obligations, indicating potential liquidity problems.

**Comparing ratios:**

- **Current Ratio of 1.50:**  
  - For every \$1 of liability, there are \$1.50 in assets.
  - This indicates a healthier liquidity position, allowing more cushion against short-term liabilities and unexpected events.
  
- **Current Ratio of 15.0:**  
  - While this may seem extremely positive, an excessively high ratio could indicate that the firm is not using its current assets efficiently.
  - It might hold too much idle cash or inventory, which could otherwise be invested to generate higher returns.
  - Thus, although the firm would be very liquid, it could also be missing opportunities for growth.

**Reference:**  
- Brigham, E. F., & Ehrhardt, M. C. (2013). "Financial Management: Theory & Practice."

# 4. Peer Group Analysis

**Using Peer Group Analysis as a Financial Manager:**  
- **Benchmarking:** Compare key financial metrics (e.g., profitability, liquidity, leverage) of your firm with those of similar companies.
- **Identifying Strengths and Weaknesses:** Recognize areas where your firm outperforms or lags behind industry standards.
- **Strategic Planning:** Inform decisions regarding investments, cost management, and performance improvement initiatives.
- **Risk Assessment:** Understand competitive positioning and market trends by seeing how peers navigate economic cycles.

**Difference Between Peer Group and Aspirant Group:**  
- **Peer Group:**  
  - Consists of companies that are similar in terms of industry, size, business model, and market environment.
  - The focus is on comparing current performance with those operating under similar conditions.
  
- **Aspirant Group:**  
  - Includes companies that your firm may aspire to match or surpass in terms of growth, innovation, or market position.
  - These companies may not be direct competitors or similar in size, but they represent benchmarks for future strategic goals.

**Reference:**  
- Fabozzi, F. J., & Peterson, P. P. (2003). "Financial Management and Analysis."  
- White, G. I., Sondhi, A. C., & Fried, D. (2003). "The Analysis and Use of Financial Statements."
# 1. Agency Problems **Ownership and Control:** - **Ownership:** Shareholders own the corporation. - **Control:** Shareholders elect directors who manage the firm. **Agency Relationship:** - Exists because shareholders employ managers to run the company. - Conflicts arise due to differing interests and information asymmetry. **Problems:** - Managers may act in their own interest rather than shareholders'. - Monitoring managers is costly. **References:** - Jensen, M. C., & Meckling, W. H. (1976). "Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure." - Eisenhardt, K. M. (1989). "Agency Theory: An Assessment and Review." Academy of Management Review, 14(1), 57–74. # 2. Enterprise Value **Definition:** - EV = Market Value of Equity + Market Value of Debt - Cash and Cash Equivalents. **Importance to Purchasers:** - Represents the net cost to acquire the company. - Provides a capital structure-neutral valuation. - Facilitates meaningful comparisons between firms with different financing structures. **Reference:** - Damodaran, A. (2012). "Investment Valuation: Tools and Techniques for Determining the Value of Any Asset." # 3. Current Ratio **Current Ratio Formula:** $$ \text{Current Ratio} = \frac{\text{Current Assets}}{\text{Current Liabilities}} $$ **Interpretation:** - **0.50:** Indicates potential liquidity issues. - **1.50:** Suggests a healthy liquidity position. - **15.0:** Extremely high, may indicate underutilization of assets. **References:** - Brigham, E. F., & Ehrhardt, M. C. (2013). "Financial Management: Theory & Practice." # 4. Peer Group Analysis **Usage by Financial Managers:** - Benchmarking financial metrics against similar companies. - Identifying strengths and weaknesses. - Informing strategic planning and performance improvement. - Assessing risk and market positioning. **Difference Between Peer and Aspirant Groups:** - **Peer Group:** Consists of similar companies for direct comparison. - **Aspirant Group:** Includes companies to set future performance goals, not necessarily direct competitors. **References:** - Fabozzi, F. J., & Peterson, P. P. (2003). "Financial Management and Analysis." - White, G. I., Sondhi, A. C., & Fried, D. (2003). "The Analysis and Use of Financial Statements."

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