Question Tag: Private placement

a)

i) Areas of Conflict Between Management and Shareholders:

1. Risk-Taking:
   Management might be interested in taking higher risks, but shareholders might prefer to avoid excessive risks to protect their investment and ensure steady returns.
2. Short-Term vs. Long-Term Performance:
   Management may focus on short-term decisions to generate quick profits, which might not align with shareholders’ interest in long-term growth and value maximization.
3. Gearing Level Decisions:
   Management might introduce or increase debt in the capital structure, raising the level of financial risk, which might not be acceptable to shareholders who prefer a more conservative approach.

(Any 3 points explained @ 2 marks each = 6 marks)

ii) Costs to Shareholders for Appointing Management:

1. Hiring and Reward Costs:
   This includes salaries, benefits, and bonuses paid to management, which represent a cost to shareholders.
2. Cost of Appointing Independent Non-Executive Directors:
   Shareholders may incur costs in appointing independent non-executive directors to oversee management and ensure accountability, which also adds to the overall cost.

(Any two points @ 2 marks each = 4 marks)

b)

i) Annual Yield Buyers of the Bond Will Earn:

ii) Cost of Both Bond and Private Debt:

Cost of Public Bond (Kd):

Cost of Private Debt:

$$Kd=26\%\times (1-\text{Tax Rate})=26\%\times (1-0.3)=18.2\%$$