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Managerial Finance - Essay Example

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The assumptions and objectives of the shareholder on wealth maximization model include that a given company’s objective should…
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Managerial Finance
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Download file to see previous pages Any effort that could increase profits above the hurdle will be ignored since the manager after meeting such pre-set goals will relax.
Again, setting hurdles will also work against the regional executives since different policies affect investments differently according to the given country. Each country has a different inflationary level, lending rate, political stability and other cultures which together or singly affects investments. Setting a uniform hurdle rate is being unfair to countries with unfavourable investment policies.
2 Investing in Lower risk projects will normally be a favourite of the lower division managers since chances of them losing out on the investment is limited. This however, will always come with unfavourably low or unattractive incomes. While this might appear favourable to the managers, it may turn out to be a dislike of the shareholders. Shareholders would want to maximize profits without regards to risks involved, while the managers are more concerned about the risks involved in each venture.
Risk is may be defined as the standard difference of return on an investment or portfolio of assets. It is measured using different methods including Value at risk. It helps business men to get prepared for the potentially turbulent market and is quoted in terms of percentage and fixed time horizon (Kwon Joon Chang, 2008).
If a 77% one day of value at risk, and the security of 6%. This means that the estimate for the example is that in the next one day, there is 77% chance that the security will not lose more than 6% of its value. The equation may be written as: VaRα = inf{x ϵ R: P (L > x) ≤ 1 – α}
It does not take into account the downside potential in case the portfolio encounters the one percent chance that it exceeds the loss threshold. In other words, once the losses exceed the threshold, ...Download file to see next pagesRead More
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