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    BFI 220 CAT Answers

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    samkimari5
    1) Watch for signs of weak accounting or unrealistic assumptions that could indicate managers prioritizing their own interests over shareholders. This misalignment of incentives is a classic agency problem. 2) Beware of unintelligible financial disclosures, as opaque language allows managers to hide information that does not serve shareholders. Agency theory predicts managers may act this way to pursue their own goals. 3) Remain skeptical of ambitious projections, as growth expectations presented by managers could be unrealistically high to advance the managers' interests rather than provide an accurate outlook. Agency theory would suggest managers may issue biased forecasts that do not fully consider shareholders' best interests

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    BFI 220 CAT Answers

    Uploaded by

    samkimari5
    22 views2 pages
    1) Watch for signs of weak accounting or unrealistic assumptions that could indicate managers prioritizing their own interests over shareholders. This misalignment of incentives is a classic agency problem. 2) Beware of unintelligible financial disclosures, as opaque language allows managers to hide information that does not serve shareholders. Agency theory predicts managers may act this way to pursue their own goals. 3) Remain skeptical of ambitious projections, as growth expectations presented by managers could be unrealistically high to advance the managers' interests rather than provide an accurate outlook. Agency theory would suggest managers may issue biased forecasts that do not fully consider shareholders' best interests

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    BFI 220 CAT answers

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    1) Watch for signs of weak accounting or unrealistic assumptions that could indicate managers prioritizing their own interests over shareholders. This misalignment of incentives is a classic agency problem. 2) Beware of unintelligible financial disclosures, as opaque language allows managers to hide information that does not serve shareholders. Agency theory predicts managers may act this way to pursue their own goals. 3) Remain skeptical of ambitious projections, as growth expectations presented by managers could be unrealistically high to advance the managers' interests rather than provide an accurate outlook. Agency theory would suggest managers may issue biased forecasts that do not fully consider shareholders' best interests

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    Download as docx, pdf, or txt
    22 views2 pages

    BFI 220 CAT Answers

    Uploaded by

    samkimari5
    1) Watch for signs of weak accounting or unrealistic assumptions that could indicate managers prioritizing their own interests over shareholders. This misalignment of incentives is a classic agency problem. 2) Beware of unintelligible financial disclosures, as opaque language allows managers to hide information that does not serve shareholders. Agency theory predicts managers may act this way to pursue their own goals. 3) Remain skeptical of ambitious projections, as growth expectations presented by managers could be unrealistically high to advance the managers' interests rather than provide an accurate outlook. Agency theory would suggest managers may issue biased forecasts that do not fully consider shareholders' best interests

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    of 2

    ST.

    PAUL’S UNIVERSITY
    FACULTY OF BUSINESS AND COMMUNICATION STUDIES
    BACHELOR OF BUSINESS ADMINISTRATION
    CAT 1
    BFI 220: BUSINESS FINANCE

    Instructions:
     Answer ALL questions
     Ensure your answers are well argued and clear
     Avoid copying from your colleague. Similar work will be heavily penalized
     Avoid copy and pasting information/answers from the internet
     The CAT should be submitted only through the E-learning portal
     CAT is due on 15/10/2022

    Question one
    Financing and Leverage
    Leverage is one of the most powerful concepts in finance, and it is critical in financing choices and capital structure. You
    may have friends who get weepy- eyed when they talk about leverage and robustly argue against it. Empires have been
    built and destroyed because of leverage. However leverage in finance allows owners to control assets they couldn’t
    control otherwise.
    Required
    a. Discuss five ways that Kenyan companies have used leverage to their advantage.

    ● Companies use leverage to finance their assets—instead of issuing stock to raise capital, companies can
    use debt to invest in business operations in an attempt to increase shareholder value.
    ● increases the liquidity available to the company- when a company takes out a loan or debt, it receives cash
    from the lender, this debt is paid in small installments over a relatively long period of time .and that cash can be
    used for a variety of activities . These activities include purchasing new machinery or constructing a new
    building, which will increase the efficiency of the company, or the company can use the cash to purchase other
    companies, which will increase the scale of operations of the company,
    ● companies use leverage to multiply their buying power in the market. -Buying power is the money an
    investor has available to buy securities in a trading context..Additional buying power magnifies both profits and
    losses. leverage gives the investor an opportunity to make increased gains with the use of more buying power
    ● Magnification of Shareholder Profits-If a company is solely financed by shareholder equity, then its
    profitability to the shareholders will change in proportion to its own change in profitability. For example, should
    profits increase by ten percent, the shareholders' dividends or share value will increase by ten percent. If the firm
    is leveraged, then that increase in profitability of the operation will not increase the payments needed to service
    the debt. Thus the excess profit is all passed to the shareholders and will necessarily increase the value of shares
    or dividends to a greater degree than the increase in the operation's profitability.
    ● multiplication of profits for the company-in the case of a growing company that requires cash for its operations,
    the use of debt can result in a multiplication of profits for the company. As long as the company is growing,
    leverage tends to magnify the company's profits.

    (10 marks)
    b. With reference to the Kenyan context, explain five ways in which you can use leverage to your advantage.
    (10 marks)
    ● Make a relatively small upfront investment.Leverage is an investment strategy that involves
    borrowing money to increase the potential return on investment.by this it will be easy to start a large
    business with your little amount and be able to keep up with the competition with an already existing
    market.
    ● Higher Profits-Leverage gives you the possibility to enjoy increased profits that are much more that
    what you will initially get from your upfront investment .The interest rates are always low hence one can
    get much profit even after paying the loan
    ● Bigger Exposure-You don’t have to restrict yourself from taking a single or a few lots of any call or put
    option just because you are short of money. With leverage, you can actually have bigger exposure in the
    index or stock whose option or futures contract you are planning to take.

    ● Gaining a competitive advantage-A small business builds a competitive advantage by


    providing a better overall value to customers than competitors are able to.Kenya being an
    economy with full SME one can use leverage to his/her advantage by gaining more capital to
    increase its marketing effort and also meet customer satisfaction.

    Question two
    Three suggestions for investors
    First, beware of companies displaying weak accounting. If a company still does not expense options, or if its pension
    assumptions are fanciful, watch out. When managements take the low road in aspects that are visible, it is likely they are
    following a similar path behind the scenes. There is seldom just one cockroach in the kitchen....
    Second, unintelligible footnotes usually indicate untrustworthy management. If you can’t understand a footnote or other
    managerial explanation, it’s usually because the CEO doesn’t want you to. Enron’s descriptions of certain transactions
    still baffles.
    Finally, be suspicious of companies that trumpet earnings projections and growth expectations. Businesses seldom operate
    in a tranquil, no-surprise environment, and earnings simply don’t advance smoothly (except, of course, in the offering
    books of investment bankers).
    Required
    Read the write up above and evaluate it from the agency theory perspective. (10 marks)

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