Wealth Maximization and the NPV Method

Wealth Maximization and the NPV Method It has long been an accepted perception that the objective of management is the maximization of shareholder wealth. As we know the corporate objective of a firm is to maximization share holders wealth in order to achieve this corporate goal there is a problem arising called agency problem. The corporate firms are managed by professional managers these managers do not own a 100% share so managers may not work to wards the best of firms goal of maximizing shareholders wealth because of the conflicting interests, in this assignment we will examine the firms corporate goal. The this study contends that it is to evaluate the usefulness of Net Present Value but also taking to the account the effect of agency problem inside the company. 2. Introduction Owners are primarily interested in the wealth creation ability of an entity, and they typically monitor their investments by the valuating of the investments financial return. Shareholders tend to prefer that all long-term corporate decisions to be evaluated based on the investments contribution to the maximization of shareholder wealth. Dean (1994) suggests that the primary objective of the modern corporation should be to maximize the present worth at the companys cost of capital of the future stream of benefits to the stockholder. All other objectives should be either intermediate or subsidiary to this overriding companys financial objective Question1 3.0. Shareholders Wealth Maximization Concept The maximization of shareholders wealth is a significant objective of management. According to Dr.R.Srinivasan,(2010)Any action which results wealth or which has a net present value is a preferable one and should be undertaken. The wealth of the company is based on the maximization of the present value of the entity. i.e., the present worth of the entity, This wealth may be measured if the organization has shares that are traded by the public, this because the market price of the share is indicative of the value of the organization. And to a shareholder, the word wealth is based upon the amount of shareholders current dividends and the market price of share. Ezra Solomon has described a wealth maximization goal in these terms: The gross present worth of a course of action is equal to the capitalized value of the flow of future expected benefits, discounted (or capitalized) at a rate which reflects the uncertainty or certainty. Wealth or net present worth is the difference between gross present worth and the amount of capital investment required to achieve the benefits. On the other hand a public sector company which its equity stock is fully owned by the government, and also not traded in stock market? In such companies, the objective of management should be to maximize the present value of the stream of equity returns. Of course in determining the present value of stream of equity returns, and must use the most appropriate discount rate. A same observation may be made with regarding to other entities which their equity shares are either not traded or very rarely traded. In the above definition, one thing is for sure that the wealth maximization is a long-term strategy that emphasizes raising the net present value of the owners investment in a company and the implementation of this objective that will appraise the market value of the companys securities. This concept, if applied, meets the briars raised against the old concept of profit maximization. The manager also faces with the uncertainty problems by considering the trade-off between the different returns and their associated levels of risks. It also considers the dividends payment to shareholders. All these components of the wealth maximization goal are the outcome of the investment, financing and dividend decisions of the company. Question2 4.0. The Agency Problem Theory Agency problems exist in large companies because of the conflicting of interests which sometimes arise between shareholders and managements. In most large organizations, managers only own a small percentage of the stock. They may consider by placing their own interests above those of the shareholders. For example, the managers may multiple their personal wealth by doubling their salaries, bonuses, or option grants as high as possible and by increasing their perquisites including luxurious offices, corporate jets, generous retirement plans, and the like at the expense of outside shareholders. Shareholders may take actions through their companys managers that affect the riskiness of the company like investing in more risky assets. Increasing a companys riskiness can negatively affect the safety of its debt. A potential agency conflict comes whenever the manager of a company owns less than 100 percent of the companys common stock. If a company is a sole proprietorship company and managed by its owner, the owner-manager will always consider maximizing his or her own wealth. The owner-manager will carefully control cost by individual wealth, but may trade off other considerations, such as perquisites and leisure, against individual wealth. If the owner-manager forgoes a portion of his or her ownership by selling some of the entitys stock to external investors, a potential conflict of interest may arise, called an agency problem. E.g. the owner-manager may prefer a more leisurely lifestyle and not work as to maximize shareholder wealth, because less of the wealth will now accrue to the owner-manager. In addition, the owner-manager may decide to consume more perquisites, because some of the cost of the consumption of benefits will now be borne by the external shareholders. As defined by Robert T. Kleiman. Agency theory raises a fundamental problem in company, self-interested behavior. A corporations managers may have their own personal objectives that challenges with the owners objective of maximization of shareholder wealth. Although the shareholders recognize managers to manage the companys assets, a potential conflict of interest may exist between these two groups. According to Jensen/Meckling (1976) an agency relationship exists when one or more persons (the shareholders or the principles) negotiate another person (the agent) to do some service on their behalf which involves delegation of some authority to make decision. If both parties maximize their own utility there is good proof to consider that the management (agent) will not always act in the best interest of the shareholders (principal). As a result the principal will try to limit the divergence from his interests by monitoring the agent. The dilemma is, that the cost of monitoring the agents actions (monitoring expenditures) can be significant and can in fact exceed the loss due to the agency relationship. The principal will therefore try to establish incentives for the agent in a contract so that the agents actions are in the interest of the principal without costly monitoring. Additionally there will be situations where it will pay for the agent to expend resources on actions to guar antee that he will act in the sense of the principal (bonding expenditures) or to ensure that the principal will be compensated in such cases. As a result it is impossible for the principal and the agent to ensure at zero cost that the agent will make optimal decisions from the viewpoint of the principal. Given the complex structure of agency relationships these costs will be pecuniary and no pecuniary as well. In general, the principal and the agent will have positive monitoring and bonding costs and there will still be some divergence between the agents decisions, subject to the optimal monitoring and bonding activities, and those decisions that would maximize the welfare of the principal. The value (in money terms) of this divergence is often referred to as the residual loss. According to Jensen/Meckling (1976) agency costs could therefore be defined as the amount of: à ¢Ã¢â€š ¬Ã‚ ¢ The evaluating expenditures by the principal, à ¢Ã¢â€š ¬Ã‚ ¢ The bonding expenditures by the management and à ¢Ã¢â€š ¬Ã‚ ¢ The residual loss 5.0. NPV Method of Investment Appraisal The net present value (NPV) is described very fully both in principle and application and in how the decision rules are derived. Different sets of circumstances are introduced to show how the NPV approach can cope with the situations met in an imperfect world, (e.g. taxation, inflation, different interest rates, repeat investments, mutually exclusive investments, capital rationing). As clarified by Averkampt H. (d.t) who defined NPV as the acronym for net present value. Net present value is a computation that differentiates the amount invested today to the present value of the future cash receipts from the investment. In other words, the amount invested is compared to the future cash amounts after they are discounted by a specified rate of return. 5.1. Advantages and disadvantages of NPV method The NPV method has pros and cons I mean negative and positive sides. First, the NPV method makes more appropriate adjustments for the time value of money. Second, the NPV rule focuses on cash flow, not accounting earnings. Third, the decision rule to invest when NPVs are positive and to refrain when from investing when NPVs are negative reflects the firms need to compete for funds in the marketplace rather than an arbitrary judgment. Fourth, the NPV approach offers a relatively straight forward way to control for differences in risk among alternative investments. Cash flows on riskier investments should be discounted at higher at higher rates. Fifth, the NPV method incorporates all the cash flows that a project generates over its life, not just those that occur in the projects early years. Sixth, the NPV gives a direct estimate of the change in shareholder wealth resulting from a given investment. Although we are enthusiastic supporters of the NPV approach, especially when compared with the other decision methods, we must acknowledge that the NPV suffers from a few weaknesses. Relative to alternative capital budgeting tools, the NPV rule seems less intuitive to many users. 5.2. Recommendations Finally, at the starting of an NPV analysis it is very significant to identify the objective of the project. If the goal is to reduce the costs of operations and also prices. As to enhance the organizations revenues, the forecasted increase in revenues needs to be evaluated and included as a positive cash flow in the computation. But if the objective in mind is to survival then a negative NPV might be reasonable if the negative financial impact of the investment is influenced by the potential financial losses that may be related with the ignored project. In some cases, the analysis led to the conclusion that mobilizing the capital required implementing the core lab project is in keeping with a strategy to maximize potential returns. The NPV method evaluates the present value of the future cash flows that a project will have. A positive NPV is that the investment should appreciate the value of the company and also promote to maximizing shareholder wealth. A positive NPV project gives a return that is more than enough to compensate for the required return on the investment. Thus, using NPV as a guideline for capital investment decisions is consistent with the goal of creating wealth. Moreover the NPV of the future benefits is the difference between net present value of the benefits and the investment required to achieve those benefits. A financial action resulting negative NPV should be rejected, because this will not generate a wealth to the shareholders. Therefore the organization should take a course of financial action e.g. invest in a project where there is a increase in the wealth of the firm or a project which have a positive NPV. 6.0. Conclusion The efficiency of management is assessed by the success in achieving the companys objective. The shareholder wealth maximization objective as defined that management should work towards maximizing the net present value of the expected future cash flows to the shareholders of the company. Net present value is the discounted sum of the expected net cash flows. Some of the cash flows, such as capital outlays, are cash outflows, while some, such as cash generated from sales, are cash inflows. Net cash flows are obtained the different between cash outflows and cash inflows. The discount rate considers the time framework and risk of the future cash flows that are available from an investment. The longer it takes to receive a cash flow, the lower the value investors wants to put on that cash flow now. The greater the risk associated with receiving a future cash flow, the lower the value investors place on that cash flow.

The Important of Saving Money

Nowadays, money is important to us in our life. Without money, many thing will not success and we will get many problem and tough in our life. Every people think that money is important for them, all of us work hard to hope can get more and more money. The money is wont enough in our daily life. We should save the money that we have but not use all of it. If we have sick, we should need money to but medicine or see doctor. If we do not have money, we will can't get a treatment and we will get die or else.In this essay, this essay will discuss about the important of saving money. First and foremost, saving money can help us to get money when we need money urgently. For example, when our family need money to have some medical treatment, we can take out our money to help them for their medical treatment. So, we do not need to borrow money from anywhere from people, we can use the money that we save to solve the problem. In addition, we should save money for our future. When we need to m arry, we should need a lot money.If we do not have money, no girl will like to marry us. So, we should need to save money. After we marry, we will need to buy car and house. If we have save money, we would have money to buy it. So, we will not be troublesome when we need to buy. After we marry, we would have our children. We will need many money for our children. We need money for the milk, fees and many more. When they go study, we will need to pay for their fees, tuition and their books. So, saving money is important for our future. Furthermore, we save money can use to go for travel.After we had hardworking earn money and busy for the life everyday, we should have to relax ourselves such as travel. If we have save money every month, we will have money to go travel. We can bring our family to go for travel and make the relationship to be closer. So, we can know more about our family and can live happily. We can relax ourselves after our hard work. So, if we save money, we can go t ravel and relax ourselves. There is another benefit of saving money. Besides, saving money can let us do not use our parents' money.We are adult already, So, we must save money and do not take money from parents anymore. Although we are studying now, we can try not to take money from them. Not only like that, we can save some money as we can to buy some present for our parents when their birthday. They will feel very happy if they get present from us. So, saving money can help us to let them happy. In conclusion, saving money bring many benefit to us. So, we should save money to let us have moeny to use when we need. If everybody know to save money, then we can decrease the beggar too.

Restaurant Concept Statement Essay

Cowgirls Steakhouse will be fun, country style restaurant that serves southern comfort food. It will be located right in the heart of Austin, the capital of Texas. The goal of the restaurant is to make every guest experience a great and exciting one and to serve good quality food at an affordable price. It will be a great place for almost any occasion because we will accommodate big parties and provide excellent service while making the experience memorable. The atmosphere of Cowgirls Steakhouse is going to be inviting and invigorating. As you walk in to the lobby, the aroma of the steaks, smoked brisket, and barbequed ribs will fill your nose, along with the sweet smell of freshly baked biscuits and apple pie. We will have the best of the best country music playing throughout the place that makes you feel like you are at a rodeo about to saddle up. The hostess’ and the servers are going to be women that are dressed up in cowboy hats, button down long sleeve tops, blue jeans, belt buckles, and boots. Each of them are going to be ready show you a great time and provide you with professional and friendly customer service. Read more:  Essay About Restaurant Review   The walls of the restaurant will have great country dà ©cor including hung up horse saddles, ropes, horseshoes, cast iron skillets, framed pictures of country legends and cowgirls, neon light beer signs, etc. The floors will be covered with peanut shells, but it’s not trash, it’s decoration for the country folk! As you are lead into the dining room and seated in your booth or table with chairs, you will be given a big bucket of peanuts for a small, free starter. Don’t be shy! Go ahead and throw the peanut shells on the floor when you are done. Our house is your house. We will even put a southern touch on the beverages by serving all of the non-alcoholic drinks in Mason jars. When it comes to the alcohol, we will have many kinds of imported and domestic beers, creative and classic cocktails, and aromatic wines. If the bar is where you are headed, then we hope you enjoy the several plasma screen t.v’s we will have above the bar that are playing different sport’s games. Don’t miss the big game just because you wanted to eat some great food. Maybe you come with a hankering to party a bit more, well than head right on in to the second section of the  restaurant. This closed off space will consist of another full bar, bar stools and tables, and a small stage at the end where we will have great live country bands playing every Friday and Saturday night. We will have all the best things in one; great service, great music, and damn good southern comfort food. Although this is a steakhouse, amazing steaks are not the only thing we will be known for. When you think of southern country style food, you think brisket, ribs, fried chicken, and chili. Well that is exactly what we will offer. We are going to slow smoke our brisket overnight so when you take a bite it almost melts in your mouth. The natural smokey flavor couldn’t get any better. Our ribs with our brown sugar based dry rub is also going to be one of the highlights on the menu. The flavor and tenderness of them are out of this world.

Acceptance Rates for Ivy League Schools Class of 2020

All of the Ivy League schools have an acceptance rate of 14% or lower, and all admit students with exceptional academic and extracurricular records. In recent years, Cornell University has had the highest acceptance rate among the Ivies, and Harvard University has had the lowest admit rate. The table below presents the most recent acceptance rate data for the Ivy League schools. To see what kind of grades and standardized test scores youre likely to need to be admitted, click on the graph link in the right-hand column. Ivy League Acceptance Rates for Class of 2020 School Number ofApplications NumberAdmitted AcceptanceRate Source GPA-SAT-ACTData Brown University 32,390 2,919 9% News from Brown see graph Columbia University 36,292 2,193 6% Columbia Spectator see graph Cornell University 44,966 6,277 14% Cornell Chronicle see graph Dartmouth College 20,675 2,176 10.5% Dartmouth News see graph Harvard University 39,041 2,037 5.2% Harvard Magazine see graph Princeton University 29,303 1,894 6.5% News at Princeton see graph University of Pennsylvania 38,918 3,661 9.4% The Daily Pennsylvanian see graph Yale University 31,455 1,972 6.7% Yale News see graph Will You Get In?  Calculate your chances with this free tool from Cappex Why Are the Ivy League   Acceptance Rates So Low? Every year, the overall acceptance rates to the Ivy League get lower and lower even if individual schools may see slight increases from time to time. What drives this seemingly endless increase in selectivity? Here are a few factors: The Common Application: All of the Ivy League schools along with hundreds of other selective colleges and universities accept the Common Application. This makes it easier for students to apply to multiple schools for most information on the application (including the main application essay) needs to be created just once. That said, all of the Ivies do require multiple supplemental essays from their applicants so that it isnt an effortless   process to apply to multiple schools.The Prestige Arms Race: Every year, the Ivies are quick to publish their latest admissions data, and the headlines typically shout to the world that the school had the Largest Applicant Pool in School History or had the Most Selective Year in School History. And whether they admit it or not, the Ivies are always comparing themselves to each other. The schools have such strong name recognition that they really dont need to invest much money or effort in recruitment, but they do, in fact, recruit heavily. More applications means more selectivity which in turns means more prestige.International Applicants: A significant piece of the ever-decreasing admit rates is a steady increase in applications from abroad. While the population of U.S. high school seniors isnt growing significantly, that fact is offset by a steady increase in applications from abroad. The Ivies have powerful name recognition across the globe, and they also offer generous financial aid to deserving students from international students. Thousands of students from countries like China, India, and Korea apply to the Ivy League schools. Why Is It So Much Easier to Get Admitted to Cornell than Other Ivies? In many ways, its not. Cornell University often gets looked down upon by the other Ivies (and applicants to the Ivies) because its acceptance rate is always higher than the other universities. Acceptance rate, however, is just one piece of the selectivity equation. If you click on the GPA-SAT-ACT graphs above, youll see that Cornell admits students who are similarly strong to those who get into Harvard and Yale. It is true that if youre a straight-A student with lots of AP courses and a 1500 SAT score, youre more likely to get into Cornell than Harvard. Cornell is simply a much bigger university so it sends out a lot more acceptance letters. But if youre a B student with middling SAT scores, think again. Your changes of getting into Cornell are going to be extremely low. When Will Acceptance Rates for the Class of 2021 Be Available? The Ivy League schools are quick to publish results for the current admissions cycle as soon as admissions decisions have been delivered to applicants. Typically the latest numbers become available in the first day or two of April. Keep in mind that the acceptance rates announced in April often change slightly over time as colleges work with their waitlists in the spring and summer to make sure they meet their enrollment goals. A Final Word about Ivy League Acceptance Rates: Ill end with three pieces of advice related to the Ivies: You should always consider the Ivies reach schools. The acceptance rates are so low that thousands of exceptional students get rejected. Your eight AP classes, 4.0 unweighted GPA and 1580 SAT score are not a guarantee of admission (although it certainly helps!). Ever year, I encounter heart-broken students who falsely assumed they would get into at least one of the Ivies only to end up with a stack of rejections. Always apply to a few schools that are less selective even if youre an impressive student.There is nothing magical about the Ivies. Its disheartening when I meet students (and their parents) who have tied up their sense of self-worth with admission to an Ivy League school. There are hundreds of colleges and universities in the U.S. that will deliver an education that is as good or better than an Ivy League education, and there are plenty of non-Ivy League schools that do better in relation to student growth and professional success.The eight Ivies are not at all the same. Ev ery year youll see the national news headline of the kid who got into all eight Ivy League schools. This news always leaves me wondering why the heck someone would apply to all eight. A student who loves the bustle of a city might be happy at Yale, Brown, or Columbia, but would be miserable in the small town locations of Dartmouth and Cornell. A student interested in engineering would certainly find a top-notch program at Cornell, but there are many better engineering schools out there than many of the Ivies. A student looking for an undergraduate-focused education would be wise to avoid schools like Columbia and Harvard where graduate enrollments exceed undergraduate enrollments by 2 to 1.