Financial Theories Overview Essay

costs of capital to a sign would remain the same no matter what combination of financing sources the unattackable actually chose (Miller, 2001, p. 185). The dividend proposition overcomes objection to leverage proof. 3. Agency Cost guess I Michael Jensen and William Meckling define agency costs as the costs associated with joint trend by human beings, which arises when the principal hires an agent to carry out duties Oensen, 2005).Conflicts of interest between management and shareholders are inevitable and can pay off a potential loss in economic value of public corporations (Chew, 2001). For example, shareholders whitethorn want management to increase shareholder value, but management may grow the business to increase personal power and wealth (Chew, 2001). Enrons troupe was worth $30 billion and senior managers tried to suffer a $40 billion of excess valuation.Ultimately Enron executives destroyed the company by trying to fool the markets by means of accounting manipula tions, hiding debt through off-balance sheet partnerships, and over hyped new ventures such as their broadband futures effort Oensen, 2005, pp. 10-11). John Roth, former chief executive officer (CEO) of Nortel, wrote off virtually cquisitions, when stock price crashed and closed down activities, which resulted in the destruction of not only the corporate value but also the social value of the company Oensen, 2005). Finance scholars found a reduction in mesh of interest between management and shareholders because of (1) product market competition and a market for executive labor