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Financial theories - Research Paper Example

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Financial theories

This theory applied to establish the expected rate of return on investments to pricing models of modern assets. Some of the attributes include the support of what information can be supportive for strategic investment (Shankman, 1999).
Agency theory aimed at the ever-present relationship of agency, in which delegation of work takes place from one person to another, usually the principal and agent. The agency theory deals with the agency clashes, between principals and agents (Bamberg & Spremann, 1987). This theory has certain attributes which includes: (1) ambiguity in routine conclusions, (2) unfavorable choice, and (3) nature of work performed (Bamberg & Spremann, 1987).
Agency Costs of free-cash-flow occur between stockholders and managers’ conflict. These conflict arises where a firms with large cash flows than positive investment forecast. The attributes are: (1) agency costs of free cash flow’s reduction benefit in debts and (2) substitution of debt against dividends (Bowie & Freeman, 1992).
Theory of Capital Structure provides the companies to organize their financial sources from internal to equity financing. Capital raising sources includes equity or debt, to equity is treated as less preferred means of raising capital. Firms usually, large firms raise their debts to support the dividend’s payment while small firms cut their debts to disburse dividend (Myers & Nicholas, 1984).
“Economic Value Added Theory” (EVA) is a technique of financial performance to compute the profit of a firm. Coca-Cola and General Motors are good examples of this theory. The attributes of this theory includes: (1) maximization of the wealth of shareholders, and (2) investors expectation of company’s growth in future profits against the cost of capital (Hayne, 1998).
“Weighted average cost of Capital is the rate of return, sometimes called discount rate” (Shankman, 1999). This applied in assessing weather the project is viable or not in the ...Show more


It underlines the relationship between operations research and economic theory. Significant attributes of this theory are: (1) assimilate the industry…
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