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RSM332H1 Study Guide - Midterm Guide: Spot Contract, Debt Ratio, Severance Package

Rotman Commerce
Course Code
Alexandre Corhay
Study Guide

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Agency problems
When goals of management and stockholders diverge
Agency costs arise from agency problems
Direct costs of making suboptimal decisions
Indirect costs of addressing agency conflicts
Monitoring CEO, restricting certain behaviours
Having debt: CEO must make cash to meet interest payments
Stock options and bonus compensation
Severance packages to ensure that CEO does best job, even if doing so may not
be optimal for career
However, also receive severance package if incompetent
Types of business organizations
Sole proprietorship
Accounting ratios
ROE = net income/ shareholder’s equity
Dupont system
Net income / total assets (return on assets) * total assets / shareholders equity (leverage ratio)
= net income/ shareholders equity = ROE
Net income/ revenues (net profit margin) * revenues / total assets (turnover ratio) = net income
/ total assets = ROA
ROE = net profit margin * turnover ratio * leverage ratio
Leverage ratio = total assets/ shareholders equity
Debt ratio =total liabilities / total assets
Debt to equity ratio = debt / shareholders equity
Cash flow to debt ratio = cash flow from operating / debt
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