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Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250

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BuyFindarrow_forward

Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250
Textbook Problem

Executive salaries have been shown to be more closely correlated to the size of the firm than to its profitability .It a firm's board of directors is controlled by management rather than outside directors, this might result in the firm's retaining more earnings than can be justified from the stockholders’ point of view. Discuss those statements, being sure (1) to discuss the interrelationships among cost of capital, investment opportunities, and new investment and (2) to explain the implied relationship between dividend policy and stock prices.

(1)

Summary Introduction

To explain: The interrelationship for the cost of capital, investment opportunities and new investment with size of firm and executive’s salary.

Introduction:

Cost of capital: The amount or funds or the opportunity cost is that cost which a business uses to make an investment. It is the rate of return which can be generated by investing the same amount of money into different investment having an equal risk rate.

Explanation
  • A firm becomes larger when the amount of investment increases so that greater the investment larger will be the firm. Thus, it must be in top executive’s best interest to observe the size of firm increases or not and this is optimal from stockholders viewpoint...

(2)

Summary Introduction

To explain: The implied relationship between dividend policy and stock prices.

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