Business Management (BIM)

SEMESTER JANUARY 2020

BBPW3103
FINANCIAL MANAGEMENT I

MATRICULATION NO : 900324025102001
IDENTITY CARD NO : 900324-02-5102
TELEPHONE NO : 016-3062407
E-MAIL : sandhya_csk@yahoo.com
LEARNING CENTRE : Shah Alam

1
 Assignment 1

The Agency's problem is a conflict-of-interest present in any partnership where one party is
supposed to serve in the best interests of another. In finance, the dilemma of an agency
usually refers to a conflict of interest between the management of the company and the
shareholders of the company (Wikipedia contributors, 2020). The agency problem can be a
huge issue in the finance world. Owners main priority is to "raise share value". In contrast,
management who is appointed by the owners has different preferences such as higher
compensation which will increase cost and reduces firm value. This is where agency
problems occur where owners and management, two different people have different objective
and goal.

Below are the famous examples

of agency relationships in
finance world:

Managers
and

stockholders
Managers and creditors
Shareholders as principal and auditors as agents
Government-linked companies (GLC) and Government heads/political
leaders

When the principal recruits an agent to perform specific duties, the hire is referred to as a
"principal-agent relationship" or literally an "agency relationship." Agents, acting as
employees are expected to serve the best interests of the principal and are obligated to do so.

2
Problems begin when the agent starts to represent different interests, such as the agent's own
interests. When a conflict of interest occurs between the importance of the principal and those
of the agent, the conflict is referred to as an "agency problem".

Generally speaking, the principal-agent issue results in an agency's costs that the principal
will bear. This matter is an example of a moral hazard. In the scope of the law, the principals
do not know well if (or to what extent) the contract has been established and end up with
agency cost. Sometimes, the principal may be so concerned about the possibility of being
manipulated by the agent that they choose not to agree at all when it would have been
beneficial for both parties as a sub-optimal result that could reduce overall welfare.

The agency problem occurs because of the issue of incentives/compensation and the low
commitment of the appointed agent in the execution of the task. An agent may be induced
to behave in a way that is not beneficial to the principal if the agent is allowed to act in such
that way. According to Hanks (2019), the fall of the Enron energy giant in 2001 has shown
how devastating the agency’s dilemma can be. The company's executives and board of
directors, including Chairman Kenneth Lay, CEO Jeffrey Skilling and CFO Andy Fastow,
sold Enron's shares at higher prices due to false accounting records that made the stock
appear to be more expensive than it indeed was. After the fraud exposed, thousands of
investors lost millions of dollars when Enron's share values plunged.

Besides, the agency problem occurs where the two parties have different interests and
asymmetrical knowledge (the agent having more information) so that the principal cannot
adequately guarantee that the agent is always acting in the best interests of the principal.
Thus, it believed that the financial decisions of internal ownership and external investors of
the companies rely on one another. We can take the well-known case in 2010, where Sime
Darby suffered huge losses compared to the last 13 years, which amounted to RM1.6 billion
to RM2.5 million with top officials were being suspended from several units. The Malaysian
Insider (Aurora 2010) states that most of the losses are due to ill-advised investments in the
energy and utility sector in Qatar, as well as to slow business practices in the construction of
the Bakun dam in Sarawak. This has triggered the agency problem because of the conflict of
interests of Sime Darby's Board of director and shareholder. This project resulted in a
company loss of RM 2 million and the company did not get any profit on this project. In turn,
it ends up making the investors not confident in investing Sime Darby's share price, and the
revenue of Sime Darby had decreased.

3
The agency cost also would increase if there is a reduction in management control. The
agency cost ratio of the business relates to the ownership interest of the manager and the
degree of external regulation. It is positively associated with the number of shareholders and
the presence of internal managers. This means that when the ownership of the manager
decreases, the expenses of the agency will increase.

Solutions for agency-problem

Various frameworks can be used to match the desires of the agent with the interests of the
principal. One of the main areas of improvement to solve the problem is the formation of a
contractual arrangement between the principal and the agent to fix information discrepancy
issues and to determine monitoring procedures (CFI Education Inc, 2020). This eventually
can resolve the asymmetrical knowledge gap by enforcing both the agent and principal to
follow the decisions and bear the future risks based on the signed contract agreement. This
contract will allow the principal to settle conflicts between the agent in a legitimate way
concerning the serious issues for any committed projects/works.

The agency's problem could also be minimized by motivating an agent to act better in
compliance with the best interests of the principal. For example, the manager may be driven
to work in the best interests of the shareholders through rewards such as performance-based
compensation, direct shareholder control, the threat of dismissal or clear and present danger
of takeovers. Principals may also adjust the layout of the agent's pay-out. This method is
called as incentivizing employees or agents to shift their interests to be beneficial for
principals (Chen, 2020).

Another effective way for companies to prevent a moral hazard is to introduce a merit-
based compensation package that provides an increased salary to agents when the goals of
the principal's objectives are achieved. Two examples of this form of compensation include a
salary plan based on the goals attained and including the company's stock as one of the
payment factors of the company. If a large portion of the agent's salary is paid out in stock
options, they will be more likely to ensure that the company does well so that they can earn a
high wage. This can be incorporated into a priority, by the director, on long-term stock prices
instead of short-term gains, so that the owners of the company benefit over a longer period of
time.

4
Firms also should take some control over management and have the added ownership on the
capital of start-up companies. Governance becomes less problematic when the owner of the
assets is actively engaged in management. That is why investment banker J. P. Morgan
used to put “his people” (principals in J. P. Morgan and Company) on the boards of
companies in which Morgan had large stakes (Anonymous, n.d.). Warren Buffett's Berkshire
Hathaway also has long used a similar approach. So other investors cannot free-ride on its
costly policy authentication.

Conclusion:

In finance, an agency problem arises mainly when the agency (management of a financial
company) neglects the best interests of the stockholders (shareholders) and instead does what
is best for the agency. Thus, there is a dispute between the importance of the principals and
the agents when there are different priorities for each party, or when there are conditions that
put the two parties at clashes with each other. The agency's problem cannot be resolved as
long as there is an agent who is not the 100% real owner of the company. Instead, principals
can take steps to reduce the risk of agency costs by forming a contract agreement,
incentivizing employees, introducing a merit-based compensation package, and taking charge
or control over the management.

In fact, directors should bear in mind that they are bound by the contractual responsibility to
uphold that they run the company in the best interests of the company and its shareholders,
not themselves, including the duty of care and the commitment of loyalty to the company.
Otherwise, the agency's problem will be more traumatic in the event of a financial crisis.

REFERENCES:

Anonymous. (n.d.). Retrieved from https://saylordotorg.github.io/text_money-and-banking-

v2.0/s11-05-agency-problems.html

Aurora. “Sime Darby to Report Biggest Ever Loss.” Malaysia Today, 4 Aug. 2010,
www.malaysia-today.net/2010/08/05/sime-darby-to-report-biggest-ever-loss/.

CFI Education Inc. (2020). Principal-Agent Problem - Overview, Examples and Solutions.
Retrieved from https://corporatefinanceinstitute.com/resources/knowledge/other/principal-
agent-problem/

5
Chen, J. (2020, January 29). Learn about Agency Problem. Retrieved from
https://www.investopedia.com/terms/a/agencyproblem.asp

Hanks, G. (2019, March 5). Examples of Agency Problems in Financial Markets. Retrieved
from https://smallbusiness.chron.com/examples-agency-problems-financial-markets-
70962.html

Wikipedia contributors. (2020, March 6). Principal–agent problem. In Wikipedia, The Free
Encyclopaedia. Retrieved from https://en.wikipedia.org/wiki/Principal–agent_problem

Assignment 2

For this task, I selected UOB and Citi Bank to study, compare the future annuity value and
analyse the impact of the interest rate on the total savings. Before we go in-depth, let’s get
some insight into both the banks and their business activities.

The UOB logo consists of the iconic red five-bar logo and the
abbreviated name "UOB" in modern and simple logo design. The
simplicity of the logo style represents the focus and clarity of the
bank. United Overseas Bank Limited (widely known as UOB) is a Singapore-based
multinational banking institution with branches mainly located in most Southeast Asian
countries. The bank was established in 1935 as the United Chinese Bank (UCB) by Sarawak
businessman Wee Kheng Chiang. UOB offers commercial and corporate banking, personal
financial services, private banking and asset management services, as well as corporate
finance, investment funds, investment and insurance services. It has 68 offices in Singapore
and a network of more than 500 offices in 19 countries and territories in Asia-Pacific,
Western Europe and North America.

Mission: People with the courage to do what’s right, consistently. 

Objective: To be recognised as a leader in consumer and commercial banking services in the
region with treasury and investment products in support.

UOB Malaysia continues to receive many awards and recognition from top publications and
prominent financial services industry organisations such as Best Financial Supply Chain
Management in Malaysia and Asia’s Best Treasury and Finance Strategies for the year 2019.

6
 Citibank Berhad is a licensed corporate bank operating in
Malaysia with headquartered in Jalan Ampang, Kuala
Lumpur and also the subsidiary of Citigroup Holding
(Singapore) Private Limited. Today, Citibank Berhad has
11 branches located across Kuala Lumpur, Selangor,
Kuantan, Penang, Malacca and Johor. It offers its customers with access to cash and a variety
of banking facilities through 11,000 MEPS (Malaysian Electronic Payment System) ATMs
covering 2,000 locations across the country. Citi is a leading brand in credit cards with the
highest profits of sales volumes, accounts receivable, and a top position in financial services,
including retail banking, commercial banking, and investment services and products
(Wikipedia contributors, 2019).

Mission: Citi's goal is to serve as a trusted partner to our clients by responsibly providing
financial services that facilitate growth and economic success.
Core activities: Safeguarding assets, lending money, making payments and leveraging the
capital markets on behalf of their clients.

In 2019, Citi Bank was ranked 8th among the 10 biggest banks in the world by Business
Insider Malaysia (Khan, 2019). Besides that, it was also listed in Forbes 2019 as Best-In-
State Banks and World's Best Banks (Forbes Media, 2019).

In the finance world, the banks deal with financing, capital structure, and money management
to help maximize returns and shareholder value. One of the most fundamental principles of
finance is that money has a time value attached to it. Time value of money (TVM) is the idea
that money currently available is worth more than the same amount in the future due to its
possible earning power. The main finance theory states that, the funds given will gain
interest; any amount of money is valued more the sooner it is received. Therefore, the general
public believes that time is crucial and the money must be handled effectively.

Based on the above concept, we will calculate the interest rate of given RM300,000 made at
the beginning of every year for 10 years together with the Future Value of Annuity (FVA)
and timeline. An annuity is a sequence of payments or transactions of the same amount at the

7
equal intervals during the interest period. An annuity that happens at the beginning of the
term is called an annuity due, and this form of annuity happens more often in future value
annuity.

UOB savings account

UOB e-Account is a straightforward savings account tailored to provide you with the highest
interest rate of 3.5% per annum (p.a.) With the UOB e-Account, you are not going to have
to waste time queuing hours at the end of the bank. Now you can handle your money from
anywhere at any time and gain high interest while you are at it (Ringgit plus, 2020).

Benefit a stable interest rate of 3.50% p.a. on the bank balance over RM 50,000, which is a
fixed deposit-like value, though enjoying all the comfortable advantages of a savings account.
Other than the ease of receiving cash anywhere, you will also be eligible for exclusive all-
year discounts at partnering outlets in Malaysia with the Smart Cash Rebates Program.

The formula for FVA calculation as below:

where:
A=annuity
i=interest rate
n=term of the loan (years)

8
In the below table, the total interest earned is RM 642,597.78 over 10 years of
period, and the final value at a point in the future will be RM3,642,597.58. It will
be worth more than the present value, given the profit is gained and rises over time.

Table of future value of annuity for UOB Bank with Interest rate of 3.5%
Accumulate Interest Accumulated
Year Savings d amount (3.5%) Interest Balance

1 300,000.00 300,000.00 10,500.00 10,500.00 310,500.00

2 300,000.00 600,000.00 21,367.50 31,867.50 631,867.50

3 300,000.00 900,000.00 32,615.36 64,482.86 964,482.86

1,200,000.0 1,308,739.7
4 300,000.00 0 44,256.90 108,739.76 6

1,500,000.0 1,665,045.6
5 300,000.00 0 56,305.89 165,045.65 5

1,800,000.0 2,033,822.2
6 300,000.00 0 68,776.60 233,822.25 5

2,100,000.0 2,415,506.0
7 300,000.00 0 81,683.78 315,506.03 3

2,400,000.0 2,810,548.7
8 300,000.00 0 95,042.71 410,548.74 4

2,700,000.0 3,219,417.9
9 300,000.00 0 108,869.21 519,417.95 5

3,000,000.0 3,642,597.5
10 300,000.00 0 123,179.63 642,597.58 8

Total 3,000,000.0 3,642,597.5

s 3,000,000.00 0 642,597.58 642,597.58 8

9
Citi Bank savings account

Based on the Ringgit plus (2020), Citi Bank Basic Savings account provides high rates of
1% p.a. Citibank's simple savings account with interest income measured regularly and paid
out on a monthly basis. Account holders shall reap income on all balances of the account.
You're able to gain low interest rates with low savings. This is an account that is available to
all individuals without age limits. You are allowed to have an initial minimum deposit of
RM 20 to successfully open this account.

Savings money guaranteed by PIDM for up to RM250,000, including both the principal sum
and the interest.

A manual equation to find out the total value with accumulated interest:

Based on the above formula, we derive RM3,170,050.39 balance at the final year with an
accumulated amount of RM3,000,000.00 for the interest of 1%. When calculating FVA, the
compound interest and number of years make a significant difference. Using the below
example, since compound interest also takes into consideration accumulated interest in
previous years, the amount of interest is not the same for all 10 years as it would be for
simple interest.

Below is the table of FVA calculation for Citi Bank with Interest rate of 1%

Accumulated Accumulated
Year Savings amount Interest (1%) Interest Balance

1 300,000.00 300,000.00 3,000.00 3,000.00 303,000.00

2 300,000.00 600,000.00 6,030.00 9,030.00 609,030.00

3 918,120.30

10
 300,000.00 900,000.00 9,090.30 18,120.30

4 300,000.00 1,200,000.00 12,181.20 30,301.50 1,230,301.50

5 300,000.00 1,500,000.00 15,303.01 45,604.51 1,545,604.51

6 300,000.00 1,800,000.00 18,456.04 64,060.55 1,864,060.55

7 300,000.00 2,100,000.00 21,640.61 85,701.16 2,185,701.16

8 300,000.00 2,400,000.00 24,857.01 110,558.17 2,510,558.17

9 300,000.00 2,700,000.00 28,105.58 138,663.75 2,838,663.75

10 300,000.00 3,000,000.00 31,386.64 170,050.39 3,170,050.39

3,000,000.0
Totals 0 3,000,000.00 170,050.39 170,050.39 3,170,050.39

Comparison and differences between the total savings from both banks

After further comparison, the total savings between UOB & Citi bank accounts are
RM472,547.19 after the deduction of total accumulated interest.

Differences in saving:
RM 3,642,597.58– RM 3,170,050.39 = RM 472,547.19

The interest rate of 3.5% and 1% have a dramatic effect on TVM calculations. This shows
that TVM depends not only on the total years/periods but also on how many percentages of
interest are paid per year. In overall, UOB Bank depositors will earn much higher interest in
10 years compared to Citi Bank account due to the interest differences of 2.5%.

Effects of the interest rate on the total savings.

Changes in interest rates can have various impacts on consumer spending patterns, depending
on a variety of factors including the current rate levels, predicted future rate changes,
commodity prices, savings, purchases, and the overall growth of the economy. In the actual
savings account, we may only have our emergency fund, but every little part count over time.
As an example, in the overall retirement savings and investment plans, interest rates may
have a massive effect on the amount we can save. The lower the current interest rates, the
higher is the lump-sum payment that is expected to match the future earnings value, since the

11
less the interest income changes the net lump-sum payment. This is how human wealth
and interest rates are directly correlated. Money-saving habits would be improved since
people will sacrifice their current spending if the interest rate rises, expecting for a higher
return. Thus, increased interest rates would make savings more appealing and promote
savings while reducing the spending or purchasing power of consumers. While a drop in
interest rates will reduce savings rewards and tend to hinder savings.

From the above analysis, we can conclude that the different interest rates offered by both the
banks have significant importance in the interest-earning and profit gaining over the years. It
is best explained by the idea of the time value of money, given that money will gain
compound interest, it is more valuable in the present than in the future because of the ability
of funds to rise in value across a given period. As such, UOB e-Account makes more returns
with accumulated interest of 642,597.58 for savings of 300k beginning in the year up to the
10th year. Overall, the interest rate will be a source of motivation for bank deposits, and
people prefer to save and invest more if the interest rate is high. Simultaneously, savings are
negatively impacted by the lower interest rate whereby people would not be interested in
saving due to the decreased returns.

(2900 words)

12
REFERENCES:

Citibank Berhad. (2018, July 1). Citibank account terms and conditions. Retrieved from
https://www.citibank.com.my/global_docs/pdf/Retail_Bank_Combined_Master_T_and_C-
Final.pdf?lid=MYENCBLDPCATLTnCGERT

Forbes Media. (2019, June 25). Citibank on the Forbes World's Best Banks List. Retrieved
from https://www.forbes.com/companies/citibank/?list=worlds-best-banks/#114b03973526.
Kagan, J. (2020, February 5). Compound Interest. Retrieved from
https://www.investopedia.com/terms/c/compoundinterest.asp

Khan, Y. (2019, July 4). These are the 10 biggest banks in the world in 2019. Retrieved from
https://www.businessinsider.my/top-10-banks-in-the-world-2019-2019-7/?r=US&IR=T.
Ringgit Plus. (2020). Citibank Basic Savings Account. Retrieved from
https://ringgitplus.com/en/savings-account/Citibank-Basic-Savings-Account.html
Ringgit Plus. (2020). UOB e-Account. Retrieved from https://ringgitplus.com/en/savings-
account/UOB-eAccount.html?filter=UOB

Schroeder-Gardner, M. (2014, February 19). How can interest rates affect my savings?
Retrieved from https://www.makingsenseofcents.com/2012/09/how-can-interest-rates-affect-
my-savings.html

13
United Overseas Bank (Malaysia) Bhd. (2020). Terms and conditions governing accounts and
services (conventional banking). Retrieved from
https://www.uob.com.my/web-resources/personal/pdf/personal/save/conventional-casa-tnc-
eng.pdf

United Overseas Bank (Malaysia) Bhd. (2020). UOB bank. Retrieved from
https://www.uob.com.my/about/about-index.page

Wikipedia contributors. (2020, February 17). United Overseas Bank. In Wikipedia, The Free
Encyclopaedia. Retrieved from https://en.wikipedia.org/w/index.php?
title=United_Overseas_Bank&oldid=941178594

Wikipedia contributors. (2019, November 9). Citibank (Malaysia). In Wikipedia, The Free
Encyclopaedia. Retrieved 10:28, November 19, 2019,
from https://en.wikipedia.org/w/index.php?title=Citibank_(Malaysia)&oldid=925375351

14