Briefly Explain the Principal-Agency Problem - Finance Assignment Help

Assignment Task

Question 1
(i) Briefly explain the principal-agency problem and can you propose one potential solution to reduce costs associated with this problem?
(ii) Specify two typical types of behavioural biases when people make financial decisions. Do you think that the behaviour of buying lottery tickets is consistent with the theory of rational expectations? Explain your answer.

QUESTION 2
(i) Alpha plc plans to issue €100 million of bonds with a face value of €50,000, coupon rate of 4 per cent and 10 years to maturity. The current market interest rate on these bonds is 7 per cent. In one year, the interest rate on the bonds will be either 8 per cent with 60 percent probability or 5 per cent with 40 percent probability.
(a) If the bonds are non-callable, what is the price of the bonds today?
(b) If the bonds are callable one year from today, will their price be greater than or less than the price you computed in (a)? Discuss your answer from investor’s point of view.
(c) If a call price is £50,000, would the firm call the bonds? Please explain your answer.

Question 3
Select a company listed on an internationally recognised and well established Stock Exchange (e.g. London, New York, Tokyo, Mumbai) for which you can access the share price data over the past 5 years.
(i) Describe the company’s business background (e.g. main shareholders/owners, features of products, CEO’s background)
(ii) Discuss how successful the company has been at delivering value to its shareholders over the past 5 years.
(iii) Determine the current value of the equity in this company. Use at least two evaluation methods of your choice (e.g. Price/Earnings Ratio, Discounted Cash Flow, Dividend Based Valuation). Do you believe that the stock of this company is currently overpriced, fairly priced, or underpriced? Support your opinion with evidence, analysis, and argument.
(iv) How can you reconcile any discrepancies in your valuations?

Note: Your answers should demonstrate an understanding of the valuation methods you use, an appreciation of their implications, and an understanding of relevant financial theory e.g. Efficient Market Hypothesis (EMH). The answers should contain details of your calculations and assumptions. In order to answer the question, you will need to consider both accounting and market information, relevant to valuation. The data you need may be available from many resources (e.g. Thomson One Banker, yahoo finance), including information from the most recent report and accounts of the company.

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