Name : Nadia Putri Winata

Nim : 23081032

TUGAS 1
MANAJEMEN KEUANGAN LANJUTAN

Question:
1. What are the differences between the goal of profit maximization and
maximization of shareholder wealth ? Why should a company concentrate
primarily on wealth maximization instead of profit maximization?
Profit maximization, the universally accepted goal of a business entity is
to increase wealth for the company's shareholders because they are the true
owners of the company who have invested their capital, considering the risks
inherent in the company's business. with high profit expectations. Meanwhile,
shareholder wealth maximization is the company's ability to operate efficiently
to produce maximum output with limited input or produce the same output with
much less input. So, it becomes the most important goal of the company to
survive and grow in the competitive landscape of today's tough business
environment.
Companies should concentrate on wealth maximization rather than profit
maximization as it is a long term goal and involves several external factors such
as sales, products, services, market share, etc. It assumes risk and recognizes
the time value of money given the operating entity's business environment. It
is mainly concerned with the long-term growth of the company and hence is
more concerned about taking maximum share of the market share to achieve a
leadership position.

2. What does you the risk-return trade-off mean?

According to Brigham and Houston (2011: 183) trade-off theory is a theory
where companies exchange the tax benefits of debt funding with the problems
posed by potential bankruptcy. The tax burden can be reduced by interest. This
deduction is more valuable for companies with high tax rates. The higher a
 company's tax rate, the greater the advantage of debt. The rate of return is the
reward expected to be obtained in the future, while risk is defined as the
uncertainty of the expected reward. Risk is the possibility of deviation from the
average from the expected rate of return which can be measured from standard
deviation using statistics.

3. What are the three types of financial management decisions? for each type of
decision, give an example of the business transaction that would be relevant.
 Funding decisions are decisions related to the amount of funds provided
by the company, whether in the form of debt or own capital, and are usually
related to the right side of the balance sheet financial report. Financial
managers must think about the combination of funds needed, including
choosing the type of funds needed, whether short term or long term or own
capital, as well as dividend policy.
 Investment decisions are decisions related to the number of assets owned,
then the placement of the composition of each asset. For example, how
much is the allocation of cash, fixed assets or other assets. This investment
decision is closely related to the left side of the balance sheet financial
report.
 Asset Management Decisions/Dividend Policy are decisions related to
efficient asset management, especially in terms of current assets and fixed
assets. Current asset management is closely related to working capital
management and those related to fixed assets are related to investment
management.

4. Why are we interested in cash flows rather than accounting profits in

determining the value of an asset?
Because it functions as a report that shows the company's cash inflow and
outflow in an accounting period, cash flow can help you control your financial
conditions on a regular basis, as well as knowing the exact sources of the
company's income and expenses. The asset value or overall company value is
determined by the cash flow it generates. A company's net profit is important,
 but cash flow is more important because dividends must be paid in the form of
cash and cash is needed to purchase assets needed to continue operations.

5. Firms often involve themselves in projects that do not result directly in profits;
for example, IBM and Mobil Oil frequently support public television
broadcast. Do these projects contradict the goal of maximization of shareholder
wealth? Why or why not
Because it can enhance the company's reputation, make it more well-
known, and boost sales, this does not conflict with the goal of enhancing the
holder's wealth shares. This therefore benefits the organization greatly in the
long run.

6. What is an agency problem? give two or three examples of decisions by

managers that lead to agency cost
An agency problem is a conflict of interest inherent in any relationship where
one party is expected to act in the best interests of another party. In corporate
finance, agency problems usually refer to a conflict of interest between a
company's management and the company's shareholders. Managers, acting as
agents for shareholders, or principals, are supposed to make decisions that will
maximize shareholder wealth even though it is in the manager's best interest to
maximize their own wealth. Example: Costs borne by the shareholder owner
(principal), when the management of the company ( agent) buys another
company to expand its power, or spends money on preferred projects instead
of maximizing the value of the company.

7. Compare the potential for agency problems in sole proprietorships,

partnerships, and corporations. In light of your analysis, why is the corporate
form of organization so popular?
 Because there is just one entrepreneur in a sole proprietorship, the
possibility of agency issues is typically higher. The company is controlled
by a single entrepreneur who also serves as the business entity's owner.
Individual business owners are personally liable for all business risks and
 obligations to the company's creditors. The entrepreneur is obligated to use
all of his or her personal resources in connection with all corporate
engagements.
 Possible issues with agency in partnership ownership The benefit of
partnership ownership is the ability to stabilize firm operations with
additional cash that can be provided by the partner or partners. No one
partner will bear the whole loss; rather, all business losses that the
partnership experiences will be shared by all partners. Partners can service
a range of clients and concentrate on their individual specialties.
 Corporations pay their own taxes, operate their businesses, earn profits or
losses, and can be held liable for illegal acts and omissions. There are more
reporting requirements for corporations, more extensive record-keeping is
required, and there are more rules and regulations covering corporations
compared to other business structures. A corporation can often obtain
business loans (i.e., issue debt) more easily than a partnership, and a
corporation can raise capital by selling additional shares to investors.
Shareholders of a company invest their money in the company with the
hope of making a profit in the future through increasing the value of the
company. Shareholders can also receive dividends, which is a portion of
the profits offered to investors. A common complaint about corporate
business structures is that corporations are “subject to double taxation.” A
corporation's profits are taxed at the corporate level, and dividends
distributed to shareholders are taxed as dividend income through a
personal schedule.
 They trade their money for shares in the company, which is why the
corporate form of organization is so well-liked. Each share is a
proportionate claim on future profits. If a shareholder sells their ownership
stake, there are no repercussions for the company's operations. Limited
liability applies to shareholders up to the value of the shares they invest in.
They are not liable for the company's debts in the case of bankruptcy and
cannot be sued for carelessness.
Case:
1. What are the advantages and disadvantages of changing the company
organization from a sole proprietorship to an Limited Liabilities Company
(LLC).?
The advantages of changing a company's organization from individual
ownership to a Limited Liability Company (LLC) are that it protects a partner's
personal assets from losses caused by the negligence of other partners in the
company. It does not limit the ability of its members to be involved in
managing the company. There is prevention of double taxation. , and
flexibility. However, the disadvantage is that ownership of this business has a
limited lifespan. Obtaining Ownership of an Existing Business

2. What are the advantages and disadvantages of changing the company

organization from a sole proprietorship to a corporation?
Corporations are generally owned by many organizations and individuals, each
organization or person owns a share, where the owner of the share is better
known as a stockholder. Stockholders can sell, buy, or gift and inherit the
shares they own to other people. The advantages of corporations are
 Limited Liability, Every fund and resource and responsibility of the
corporation is separate from that of its owner, share owners are not
responsible for the company's debts.
 Ease of Transfer Ownership, a share owner will easily sell or exchange the
shares he owns to someone who wants to buy them, without destroying the
corporation and without asking for the corporation's approval.
 Perpetual Life, Every corporation is generally formed to last forever. The
corporation can survive until its owner resigns some of the existing
shareholders.
 External Sources Of Funds, If at any time the corporation needs more
funds, then the corporation simply sells more of its existing shares.
 Expansion Potential
  Large public corporations have long-term funding sources, they can
expand into local and international markets. And as a legal entity, a
corporation can make contracts without much difficulty.
Disadvantages of Corporations are:
 Double Taxation, As a legal entity, a corporation must pay income tax. If
the corporation makes a profit, after tax they pass it on to the shareholders.
These dividends will be taxed as part of the owner's personal income, this
will result in double tax payments.
 Forming a Corporation, a corporation certainly requires a lot of money. A
charter must be obtained, and this is not easy to obtain, you need the help
of a lawyer and payment of legalization fees.
 Disclosure of Information, Corporations must make information easy for
their owners to obtain, which can be obtained through annual reports by
shareholders. Annual reports usually contain financial information in the
form of profits, sales, facilities, equipment and debts owned by the
company.
 Employee – Owner Separation: This separation between owners and
employees can cause employees to feel that what they do brings a lot of
benefits to the owner.

3. Ultimately, what action would you recommend the company undertake ? Why?
The recommended action is to convert the company from individual ownership
to a Limited Liability Company (LLC), because:
 LLCs are currently classified as transfer entities, When a company is
structured as an LLC, the profits it generates can be directly distributed to
its members without being taxed by the government from the company's
perspective. Instead, this income is taxed on each member's income tax
return.
 There is management flexibility offered with an LLC. A limited liability
company may decide to be managed by its members. Under that structure,
all members would share in the daily decisions necessary to run the
business. This often requires an agreement setting out rights and
 responsibilities. LLCs may also be managed by internal or external
managers hired to oversee the business.
 LLCs are very cheap to start. The administrative requirements for starting
an LLC are minimal compared to those for starting a corporation. In states
like Arizona, the initial filing fee for LLC articles of organization is only
$50. In some states, the fee can be $500 or more, which is still less expensive
than filing for a corporation.
 There is no limit to the number of members allowed. An LLC can be started
with any number of members. It's even possible to start an LLC with just
one member. In Delaware, an LLC can even be part of a conglomerate group
as part of a multilayer corporation.