Agency Costs of Free Cash Flow‚ Corporate Finance‚ and Takeovers Michael C. Jensen Harvard Business School MJensen@hbs.edu Abstract The interests and incentives of managers and shareholders conflict over such issues as the optimal size of the firm and the payment of cash to shareholders. These conflicts are especially severe in firms with large free cash flows—more cash than profitable investment opportunities. The theory developed here explains 1) the benefits of debt in reducing agency
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Section B Attempt Any Six Questions (6*5= 30) 1. Company A’s costs are mostly variable‚ whereas Company B’s costs are mostly fixed. When sales increase‚ which company will tend to realize the greatest increase in profits? Explain. 2. Crystal Telecom has budgeted the sales of its innovative mobile phone over the next four months as follows: Sales in Units July. . . . . . . . . . . . . . 30‚000 August . . . . . . . . . . . 45‚000 September . . . . . . . . 60‚000 October . . . .
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Cost accounting deals with ascertainment ‚ allocation ‚ apportionment accounting aspect of costs.Management accounting deals with the effect and impact of costs on the business. 2. Cost accounting provides a base for management accounting whereas management accounting is derived from cost accounting and financial accounting. 3. Cost accounting does not include financial accounting ‚ tax planning and tax accounting. Management accounting includes financial and cost accounting ‚ tax accounting
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Chapter 8 Cost Estimation and Budgeting True/False 1) Direct costs are those clearly assigned to the aspect of the project that generated the cost. T 2) Material is an example of a cost that is recurring‚ variable and direct. T Multiple Choice 1) Which of the following is a direct cost? A) labor B) rent C) depreciation on equipment D) health benefits 2) Workers paid $15.00 per hour with an overhead charge of 1.45 and a personal time allowance of 1.15‚ have what total direct labor cost for an
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Conceptual Framework Cost Accounting Cost accounting‚ as a tool of management‚ provides management with detailed records of the costs relating to products‚ operations or functions. Cost accounting refers to the process of determining and accumulating the cost of some particular product or activity. It also covers classification‚ analysis and interpretation of costs. The cost so determined and accumulated may be the estimated future costs for planning purposes‚ or actual (historical) costs for evaluating
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have a sound knowledge of cost behaviour ie fixed costs‚ variable costs‚ semi-variable costs and sunk costs. Answer: Understanding cost behaviour helps manager in anticipation of changes in cost when there is a change in their activities like production‚ sales‚ inventory pile up etc. It provides good assistance in planning‚ cost management and decision making. A number of behaviour patterns exist ranging from fixed to variable and from linear to curvilinear. Many cost predictions techniques are
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11. A total variance is best defined as the difference between total a. actual cost and total cost applied for the standard output of the period. b. standard cost and total cost applied to production. c. actual cost and total standard cost of the actual input of the period. d. actual cost and total cost applied for the actual output of the period. 12. The term “standard hours allowed” measures a. budgeted output at actual hours. b. budgeted output at standard hours. c. actual output
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business tomorrow. In order to make long-term investments in new product lines‚ new equipment and other assets‚ managers must know the cost of obtaining funds to acquire these assets. The cost associated with different sources of funds is called the cost of capital. . If the business earns more than its cost of capital‚ the market value of the business will increase. Likewise‚ if returns on long-term investments are below the cost of capital‚ market values will decline. Therefore‚ how we manage capital
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Cost of Production Fixed costs are those that do not vary with output and typically include rents‚ insurance‚ depreciation‚ set-up costs‚ and normal profit. They are also called overheads. Variable costs are costs that do vary with output‚ and they are also called direct costs. Examples of typical variable costs include fuel‚ raw materials‚ and some labour costs. An example Production costs Consider the following hypothetical example of a boat building firm. The total fixed costs‚ TFC‚ include
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Biovail Corporation. Maris didn’t like what he saw at the company‚ but he never liked writing “Sell” recommendations. In any event‚ he wanted to make sure he was giving the best advice to his investment clients. Biovail Corporation was one of Canada’s largest publicly traded pharmaceutical companies.1 For many years‚ Biovail had applied advanced drug-delivery technologies to improve the clinical effectiveness of medicines. The company commercialized its products‚ both directly (in Canada) and through
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