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Post:

Applications of concepts/ time value of money

Part 1

As we know that shareholders play an important role in the successful running of business by investing their money in the form of shares. For this purpose, they hire the managers to act from their side and business agents aim to attain new skills which will help the investors to gain some profit.

There is an always conflict between the manager and shareholders, as the manager tries to get more profit for himself by neglecting the shareholders which are not recommended by any managers, as it shows the effect on business success (Gitman, 2015).

For example, any CEO in any banking or finance industry take approximately more than $ 20million per year, whereas any CEO of retail service only make the $ 1millionper year. But we expect the same profits as both of them (Segal, 2018).

If we take the company WorldCom co-operation (2002), which gained more profits and suddenly saw a tragic fall and many employees have loosed their values. What they did is inflated the assets as much as they can to $11 billion, in turn, lead to loss of 30, 000 jobs, and $180 billion lost to their investors.

Here the management did unreported the all the line of costs and created fake accounts, internal department caught them by auditing (Keller, 2002).

There is always a conflict of interest between managers and shareholders, it should only be resolved by proper punishment or penalties. In order to resolve this issue 1) they should apply any managerial bonus for their good work 2) by watching close market prices up and down like cash flow, current value, expected profits and sales trend.

Apart from they should hold back good managers for balancing the shares equally (Chaudary, 1970). Another key issue to resolve this, give part of shares to employees including the managers, by this all three will be benefited and avoid any conflicts.

Part 2

The chapter 5 focus on ‘time value of money‘ It refers to how to calculate the future value of the money in terms of interest or compounding.

Either in the single or multiple ways from time to time. For example, if you receive $10,000 today and you are able to increase its value of your money by only investing or gaining interest over a period of time.

The corresponding interest depends on your choice and it is calculated by formula FV= PV(1+r)^n. in chapter six, it covers all the concepts of bond yields, interest rates, and all other stock valuation. The good example covering the topics is loan payment or credit card payment with offers of APR and able to calculate the future payment (Gitman, 2015).

Reference:

Chaudhary, A. (1970, January 01). Agency Problems and Ways to solve it.

Gitman, L. J. & Zutter, C. J. (2015). Principles of Managerial Finance 14thedition. Boston, MA: Pearson.

Keller, B. (2002, January 26). Enron for Dummies.

Segal, T. (2018, September 17). Enron Scandal: The Fall of a Wall Street Darling.

Shaftoe, R. (2018, June 26). Conflicts Between Corporate Management and Shareholders.