Financial Theories Overview Essay

cost of capital to a firm would remain the same no matter what combination of financial support sources the firm actually chose (Miller, 2001, p. 185). The dividend proposition overcomes objection to leverage proof. 3. Agency embody Theory I Michael Jensen and William Meckling define agency costs as the costs associated with cooperative effort by human beings, which arises when the principal hires an agent to brook out duties Oensen, 2005).Conflicts of interest between vigilance and shareholders are inevitable and fuck cause a potential loss in value of exoteric corporations (Chew, 2001). For example, shareholders may want management to increase shareholder value, but management may grow the business to increase personal power and riches (Chew, 2001). Enrons company was worth $30 billion and senior managers try to defend a $40 billion of excess valuation.Ultimately Enron executives undo the company by trying to fool the markets through accounting manipulations, cover debt through collide with-balance sheet partnerships, and over hyped new ventures such as their broadband futures effort Oensen, 2005, pp. 10-11). John Roth, former chief executive officer (CEO) of Nortel, wrote off most cquisitions, when stock price crashed and closed down activities, which resulted in the close of not only the corporate value but also the kind value of the company Oensen, 2005). Finance scholars found a reduction in conflict of interest between management and shareholders because of (1) product market contender and a market for executive labor