a. Discuss conflict of interest that may exist between managers and shareholders and give examples. (8 Marks)

b. Explain why synergy might exist when one company merges with or takes over another company. (7 Marks)

a. Conflicts between managers and shareholders

Agency problem: Managers (agents) may not act in shareholders’ (principals) best interest.

Examples: Empire building (managers pursue growth for prestige, not value); risk aversion (managers avoid risky projects to protect jobs); excessive perks; short-termism (focus on short-term earnings).

(8 Marks)

b. Reasons for synergy in mergers/takeovers

Synergy: 2+2=5, value of combined > sum.

Types: Revenue synergy (cross-selling, market access); cost synergy (economies of scale, staff reduction); financial synergy (lower cost of capital).

(7 Marks)