Assumptions of the capital asset pricing model

Reference no: EM1316021

CAPM - Agency costs.

Central to the theory of agency is the notion that firms will use optimal levels of contracting, monitoring and bonding to reduce agency costs. However, there are other ways by which agency costs may be controlled.

a) Since total agency costs increase with the level of outside financing, and firm value is maximized when agency costs are minimized, a simple method of eliminating agency costs is to only use internal financing. Why would the original owner/manager (entrepreneur) ever use outside financing?

b) Consider a world where the assumptions of the Capital Asset Pricing Model hold. How are agency costs controlled in a "CAPM world?"

c) How can the financial markets reduce the total agency costs of the firm?

Reference no: EM1316021

Questions Cloud

Word problems on linear equation : Word problems on linear equation.

Find the source of funds for decision making : Find the source of funds for decision making - If interest rates were expected to increase, which plan would you recommend? Why?

Marshallia and hicksian demand functions : Use the utility function to answer the questions, below: (x1, x2) = exp (√(x 1 ) + √(x 2 )-Derive the Marshallian (ordinary) demand function for good1 and 2, x i *(p,l), i =1,2 . Then derive the indirect utility function (p,l).

Describe forecasting of net income using ebit-eps analysis : Describe Forecasting of net income using EBIT-EPS analysis and what will be the forecast for Robert's year-end net income

Assumptions of the capital asset pricing model : Consider a world where the assumptions of the Capital Asset Pricing Model hold. How are agency costs controlled in a "CAPM world?" and How can the financial markets reduce the total agency costs of the firm?

Compare the two forecasts by utilizing mad : Calculate a 3-month moving average forecast for months 4 through 9 also Compare the two forecasts by utilizing MAD. Which forecast appears to be more accurate.

Determining standard z-scores : Is the z value positive or negative? Explain why it should be positive or negative.

Capm and valuation of the company to be purchased : CAPM and Valuation of the company to be purchased - What is the expected rate of return for BigCo and What discount rate should BigCo use to evaluate ChemCo and why?

Application problems in linear equation : Application problems in linear equation

User Account

All Pages