Corporate Finance Principles and Practice by Denzil Watson

By Denzil Watson

The 5th version of company Finance: ideas and perform rather does do what it says at the tin. Key rules and mathematical suggestions are sincerely defined step by-step and later placed into perform by using many vignettes taking a more in-depth examine genuine recognized businesses

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The USA’s response to these and a number of major corporate scandals was to pass the Sarbanes-Oxley Act (also known as ‘SOX’) which came into force under US Federal Law in July 2002. The far-reaching legislation, detailed in 11 sections or mandates, overhauled existing financial reporting standards as well as establishing new standards. indd 22 11/17/09 4:17:27 PM Conclusion Company Accounting Oversight Board), established auditor independence to limit conflicts of interest, and restricted auditing companies from providing consulting services to their audit clients.

The agency problem can also manifest itself in the financing decision. Managers will prefer to use equity finance rather than debt finance, even though equity finance is more expensive than debt finance, since lower interest payments mean lower bankruptcy risk and higher job security. This will be undesirable from a shareholder point of view because increasing equity finance will increase the cost of the company’s capital. Agency conflict arises between shareholders and debt holders because shareholders have a greater preference for higher-risk projects than debt holders.

Reprinted with permission. indd 20 11/17/09 4:17:26 PM Corporate governance Accountability and audit: the board should conduct an annual review of the company’s internal controls including their risk management system; ■ the board should establish an audit committee of at least three independent nonexecutive directors to review and monitor the company’s internal financial controls and audit function, external auditor independence and the integrity of the financial statements. They should be ‘tough, knowledgeable and independent minded’ and prevent relationships between a company and its auditors from becoming too cosy; ■ there should be full disclosure of directors’ remunerations, including any pension contributions and share options.

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