UU-MBA-750-ZM-48843

Week: 7 “Summative Assessment Task”

Tutor: Dr. Nissar Ahmad Yatoo

Student No. R2110D12950758

6th January, 2024

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 Table of Contents
1.0 Introduction………………………………………………………………….3
1.0.1 “The rights, roles and responsibilities of shareholders, board of
directors (BODs) and executive management” discussed….………..3
1.1.1 Shareholders……………………..………………………………………………………...3-4
1.1.2. Board of Directors (BODs)………………………………………......4
1.1.3. Executive management…………………………………….…4-5
1.1.4. Funds flow process………………………………………………...5-6
1.1.5. Secondary Market roles and importance………………………......6-6
1.2.0. “Why public listing of corporation…………………….................7-11
2.0 Question Two: “Corporate Bond Market”…………………………………12
2.1.0 Attributes of Debentures and Unsecured Notes……………………12
2.1.1 Debentures………………………………………………………12-13
2.1.2 “Unsecured Notes”………………………………………………..13-14
2.2.0 “Nature of the Corporate Bond Market” …………………………..14
2.2.1 “Why Corporations Raising Debit Funds Directly from Markets”….14
2.2.2 Reasons for investors providing debt funds directly.………….......15
2.2.3 “Sources of direct investments funds”…………………………….16
2.2.4 Amount raised on initial issue of the debenture.……...……………17
2.2.5 Price of the debenture after one year……………………………….18
2.2.6 “Why the value of the Debenture has changes…………………......19
3.0 Conclusion…………………………………………………………………20
References……………………………………………………………...21-22

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1.0. Introduction

Corporations and the equity markets have an imperative role to play in

the global financial system as they facilitate businesses in acquisition and
raising of capital for investors to participate in wealth creation. This paper
presents a discussion of the characteristics and elements of stock markets
and businesses, highlighting their unique contributions to an economy.
Equally investigated is the corporate bond market (CBM), with emphasis put
on all its facets. Investors and Corporations aiming at penetrating through the
difficult financial world must comprehend these aspects. This paper
investigates 2questions and puts forward possible solutions to the varied sub-
questions.

Question 1: “The Equity Market and Corporations”

1.0.1 “The rights, roles and responsibilities of the shareholders, board

of directors (BODs) and executive management” discussed.

1.1.1 Shareholders
Any a corporation or individual acquires the status of a shareholder
through the subscription at incorporation, purchase of in new issued shares
or by purchasing shares from another shareholder. In reference to
Shareholders, McLaney (2009) observed that;

“Losses are borne by them up to a maximum of the amount of their

investment in the company. The shareholders, at any particular time,
need not be the original shareholders, that is, those who first owned the
shares”.

Therefore, Shareholders are responsible for company’s initial financial

requirements and they have the opportunity to partake in decision-making
by casting votes during election of BODs and on proposals.

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 Shareholders are entitled to a share in the earnings of company which
accrue in terms of dividends, which are declared by the BODs. Shareholders
may enjoy pre-emptive rights at the time of buying new issued shares. This
kind of preferential buying of shares could successfully avert the risk of
dilution of their current shareholding.

According to Anand (2008), Shareholders are the legal owners of the

corporation and have a right to secure their investment through their
participation in the activities of the company, although such participation is
limited. This is so because of the desire to separate corporate ownership of
the corporation and its control.

1.1.2. Board of Directors (BODs)

Anand (2008) observed that the BODs is comprised of elected company
members who are given authority by the shareholders to administer the
company and its executive on their behalf. The BODs is fundamental to the
operations of a corporation since they act as governing body for the given
corporation which keeps the executive on course in form of meeting the
financial, operational and legal obligations (Anand, 2008).

It is the responsibility of the BODs to determine the strategic direction,

goals, policies and objectives of the company. In addition, the BODs has the
responsibility of appointing the company’s Executive Management to preside
over the day to day operations of the corporation.

The BODs’ duties include making sure that the executive management
while performing their duties act the best interests of the
owners/shareholders. This is in addition to deciding on risk management
and control measures, corporate governance, offering counsel and assessing
company performance.

1.1.3. Executive management

The principal role of the executive management is to effectively

administer the company by giving priority to the shareholders’ wealth and
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interest as expressed in the net worth of their shares (Anand, 2008).

The responsibility of the executive management to the BODs and

shareholders is to offer operational, legal and regulatory updates concerning
the ongoing operations and prospective projects.
Long-term business growth and effective corporate governance are
dependent on interactions and interconnection between shareholders, the
BODs, and Executive management. The shareholders have rights, duties and
obligations to sure success of their investments since they are the funders.
The BODs administers strategic choices and plays the role of a liaison between
shareholders (owners) and executive management. The day to day operations
are undertaken by executive, which also motivates the business performance.
In order to attain a harmony and balance between these varied stakeholders,
there ought to be collaborative efforts and clear definition of roles and
responsibilities of the stakeholders.

1.2.0 “Why Public Listing of Corporation and Benefits Derived”

A corporation that has started an “IPO” process and consequently been
listed on the stock exchange or the securities market is regarded as a
publicly traded company. According to Fabozzi (1981), the listing would
bring in opportunities for enhancing liquidity position of an entity by offering
accessibility to a collection of options for equity and debt financing for
accomplishing its prospective growth potential. Listing allows the
corporation to allocate stock to the general public, facilitating trade and
investment.

1.2.1 “Advantages of Corporate Form of Business Organisation and

Why an Entity May Pursue a Public Listing”

 Limited liability. With a corporate form, the entity exists as a legal

person separate from its owners/founders/shareholders. This means
that there are limitations on the liability protection. As a result, the
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 company’s assets and liabilities are not attached to those of the
shareholders, implying that in case of lawsuits or declaration of
bankruptcy, shareholders liabilities is only limited to the extent of their
shareholding. This is re-echoed by the submission of Anand (2008) that
“while the corporation’s assets can be redistributed through legal
procedures, the shareholder’s personal assets are not assessed”.
 Attainment of perpetual succession. According to Schwartz (2011),
the going concern status of a company helps maintain her legacy past
its current owners, hence there is perpetual succession provided that
it is not dissolved or change form.
 Business expansion. A corporation with publicly traded shares may
use such shares as a medium of exchange for new acquisitions, thereby
facilitating business expansion through mergers and takeovers.
 Enhanced Liquidity. Publicly listed corporations are readily available
for trading on stock exchanges, this gives shareholders and the
potential investors the flexibility of buying or selling of shares with. The
purpose of listing publicly is concerned, is to get capital by selling its
shares. This, combines with the ease of transfer of the listed shares
between and among companies to ensure improved liquidity.
 Improved Profile: Listing raises the profile of the corporation and its
trustworthiness, hence enticing clients, partners, and new workers.
This is so because the resultant mandatory requirement to comply with
the listing requirements and rules that relate to honesty in dealings
and corporate governance practices that the listed company become
subscribed to help to improve its credibility before the public thereby
enhancing investor trust and confidence. In addition, the extra scrutiny
that accrue to being in the public limelight may force managers to run
the corporation diligently and cautiously leading to improved
performance and marketability.
 Improved employee incentives. In an effort to balance the interests of
the employees' and those of shareholders, listed corporations offer stock
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 options or equity-based pay to employees.

1.3.0. “Relationship between Shareholder Value Maximisation

Objective and Problems Identified in Agency Theory”
Coming up with decisions that help to increase the financial worth of a
company to benefit the shareholders is the principal aim of maximization of
shareholder value. Agency issues that arise from the separation of
ownership and management may complicate attainment of this goal.
Therefore, mitigation of conflicts of interest that may arise between
shareholders and management is assessed in agency theory. According to
scholars such as Mallin (2013), Agency Theory means to;
“…an agency relationship wherein a party (the principal) delegates work
to another party (the agent)”.
Included in the numerous assumptions underlying the agency theory
is one that the objects of the principal who are the shareholders and those
of the agent, that is, management may conflict, the shareholder’s goal being
wealth maximization while management may pursue personal objectives,
such as high salaries and bonuses and this may be exhibited by managers
displaying egoistic tendencies. According to Hill & Jones, (1992), due to the
divorce of ownership from control, the agency theory anticipates possible
conflicts between the objectives of the agent and those of the principal.

The agency relationship may bring about numerous inadequacies of

agent conflict of interest vis-a-vis the principal’s agenda of maximizing
wealth. For example, the agent may partially or wholly decline to perform in
the best interest of the principal by misusing of their power for their own
financial benefit, or inadequate risk-taking in quest of the principal’s
interests due to conflict of interest in the risk appetites (Mallin, 2013).

Agency problems could therefore exhibit themselves through the

tendency of management to give priority to projects and company proposals
that yield high short-term profits (to drive high rewards for management),
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at the expense of projects that could bring maximum long-term shareholder
wealth. Thus, “the problem that arises as a result of this system of corporate
ownership is that the agents do not necessarily make decisions in the best
interests of the principal” (Solomon & Solomon, 2004).

Non-uniform information accessibility between the agent and principal

may worsen the agency problem especially where the agent may have greater
access to and enjoy easy accessibility to information than the principal.
Because of this risk Blair (1996) is cited in Mallin (2013) to have suggested
that;

“…managers are supposed to be the ‘agents’ of a corporation’s ‘owners’,

but managers must be monitored, and institutional arrangements must provide
some checks and balances to make sure they do not abuse their power. The
costs resulting from managers misusing their position, as well as the costs of
monitoring and disciplining them to try to prevent abuse, have been called
‘agency costs”.
Corporate Governance. Effective and efficient corporate governance
practices, for example the BODs, employee compensation plans, and
performance reviews, help to minimize the agency problems. Like one
scholar Mallin (2013), observed, agency theory puts emphasis on corporate
governance structures, like the BODs, as a mechanism that attempts to
reduce problems that may arise from the principal-agent relationship.

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1.4.0 “Funds Flow Process in the Capital Market from the Perspective of
a Corporation Raising Equity Finance”
According to Scholars Jenkinson & Ljungquist (2001), the flow of equity
funds into capital markets is either through the inaugural issue of new
securities by companies in the primary market or through secondary
markets where trading in formerly issued securities is carried out. The
procure for flow of funds for a listed company is summarized as follows;
a) Issuance of shares: In order to raise finances in exchange for
ownership stakes, the company issues new shares to the public or to
the existing shareholders.
b) Involvement of Investors: Potential investors purchase the newly
issued shares, thus bring in funds needed by the corporation to
expand.
c) Capital Utilization: The listed company uses the new capital realized
from the sale of shares for strategic reasons for instance debt reduction,
expansion and R&D.
d) Liquidity: The shares can be traded on the secondary market. This
avails the investors with an option to sell them to other interested
parties.

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1.5.0. “Secondary Market Role of the Equity Market and its Importance
to the Corporation”.

According to Chisholm (2018), the secondary market, also commonly

known as the aftermarket, is a financial market place in which potential
investors can purchase and sell formerly issued financial instruments like
bonds, stocks, and other securities. The roles of secondary markets to a
corporation include:-

a) Liquidity: These markets offer an efficient and organised avenue for

the selling and buying of listed securities at the prevalent market
prices. Therefore, since investors can easily and readily obtain and sell
their holdings, a liquid secondary market makes the listed shares and
the listed company more attractive to them, thereby sustaining
liquidity.

b) Price Discovery: The market price of listed shares is recognized

through continuous trade and this reflects the opinion on the market
regarding its value and forecasts of the company.

c) Investor Confidence: The stability of the markets and investors’

confidence and trust in the company's stock are both enhanced in a
strong secondary market. This is so because processes of market sent
mentation reaped from stock price and the trading activities can thus
be taken as gauging public perception and this can be helpful in
building and influencing investor confidence.

d) Exit Strategy: For founder or venture capitalists who may wish to exit
or sell their investments for cash, these markets offers an easy option
of doing so by simply selling their holdings.

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1.6.0. “The Meaning of the Liquidity of the Equity Market
and its Importance in the Secondary Market to Shareholders and
the Corporation”
In relation to the equity market, liquidity refers to the degree at with an
entity or individual can quickly obtain or sell of a security without
considerably varying the price of the security (Hasbrouck & Schwartz, 1988).
It is the efficiency and ease with which an investor can obtain or sell shares
of listed corporations at or near the prevailing market prices. Liquidity
indicates the capacity of the market to handle big trading capacities without
significantly disturbing the traded security's price. Since Liquidity affects
trading activities, stability of price, and investor’s trust, is a vital aspect to
both the corporation and the shareholder in the equity market as here under:-
1) Confidence of Investors. A liquid market offers the investors an option
to easily enter or exit investments without feeling major price changes,
which enhances the investors’ confidence.

2) Fair Valuation. Since company share prices are dependent on the

dynamics of the forces of demand and supply, liquidity helps in
guaranteeing that share prices suitably mirror the underlying value of
the business.

3) Attracting Investors: Investors are easily attracted to companies with

liquid shares since they may easily and quickly trade their assets as
needed with less hassles of looking for buyers while avoiding to be
trapped in illiquid positions.

4) Forecasting of revenue. Liquidity enables the company to offer

securities at current market prices or at prices that are closest to the
market’s valuation. This enables the corporation to make reliable
revenue forecasts.

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2.0. Question Two: “Corporate Bond Market”
2.1.0. Attributes of Debentures and Unsecured Notes
2.1.1. Debentures
According to Kakuru (2007), a debenture can be described as a long-
term promissory note that help in acquiring loan capital. With a debenture,
the company promises to pay to the investor the interest and principal as
agreed. The issue terms of the debenture like the coupon rate. Maturity date
and schedule of coupon payments are clearly defined in the indenture, which
is an agreement made between the issuer and the debenture holder and in
which the two parties agree to be bound by their respective obligations
enshrined therein.

The following are the major attributes of a debenture

 Debentures can either be secured or unsecured. The secured ones are

mortgaged against a company’s specified assets and in the event of
default, the investor can seize the security (Kakuru, 2007).

 Debentures have a tenure ranging from medium term to long-term

which matched the cash inflows streams generated by investments to
their anticipated term to maturity.
 They have a fixed and known rate of interest referred to as the
contractual or coupon interest rate. This interest is tax allowable, and
only taxable in the hands of the debenture holder (Kakuru, 2007).
 Debenture holders have a claim on the company’s earnings prior to that
of shareholders on liquidation (Kakuru, 2007).
 Debentures are long term fixed financial security (Kakuru, 2007).
 Debentures may also be either convertible or nonconvertible. In case of
the convertible, the holder may exchange the debenture for the equity
of the issuing entity/company after the defined period.
 Debentures have fundamentally higher chances of credit and default

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 risk owing to the single dependence on the financial capacity of the
issuing company to meet its payments. This puts debenture holders at
risk in the event of the company faces financial challenges.
 Debentures can easily be transferable thereby enabling the holders to
trade them on stock exchange markets.

2.1.2 “Unsecured Notes”

An unsecured note is a financial instrument issued by companies,
governments, or corporations to obtain finances from potential investors.
They are not backed by collateral in terms of specific assets or security like
the case is with secured bonds. They are risky investments since they solely
rely on the general creditworthiness and stability in terms of cash streams
of the issuer. In the occurrence of failure to pay, holders of unsecured notes
are viewed as the issuer's creditors and so, are entitled to assets.

Unsecured notes are not listed on the stock exchanges, however, they
are issued through private placement to obtain finances for procurements,
buyback of shares, and other corporate needs. Because of absence of
collateral, unsecured notes are highly risky, and offer better interest rates than
the secured debts backed by collateral (Chen, 2022). They are issued over
fixed periods, and with periodic interest paid at structured intervals, this may
be every quarter, half-year or yearly.

Attributes of Unsecured Notes

 They do not have explicit collateral support.
 They possess a high possibility of default risk in the event that a
company goes through financial underperformance which affect its
repayment capacity. In this case, the unsecured note holder might lose
their investment and without any claim on an organization’s income
or assets.
 Because of the high possibility of default, these notes yield higher rates
of returns than the secured notes, (Whittred and Zimmer, 1986). The
higher interests help to compensate the holders for their lack of
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 security.
Fixed and Floating Charge: These notes do not possess a fixed charge
since they don't have any explicit collateral support. Holders simply
depend on the business's overall financial stability and good
reputation. Similarly, the floating charges are not directly important
to unsecured notes due to the absence of specified collateral support
involved.

2.2.0 “Nature of the Corporate Bond Market” (CBM)

According to Hull (2015), in the financial markets, the corporate bond
sector is an avenue that allows corporations to obtain funds by selling of
bonds to prospective investors. The CBM is classified into two broad
categories, namely, the primary and secondary markets where in the former,
debt securities are initiated and issues are premiered, and the later, the pre-
existing bonds are transacted among market participants (Kidwell et al.,
2012). Corporate Bond Markets are crucial element of the larger capital
markets which offers businesses a way to acquire capital for investment.

The major participants in the CBM are issuers, bondholders and

underwriters. Individuals and financial institutions such as the insurance
companies, mutual funds and pension funds are main sources of direct
investment funders in the CBM (Madura, 2015).

2.2.1. “Why Corporations Raising Debt Funds Directly from the Markets”
 Cost-Effective Financing. According to scholars such as Fang et al.,
(2015), the companies are motivated to obtain debt financing directly
from the capital market so as to reduce on transaction costs common
with other financial intermediaries like the banks which include
premiums in their services. Dealing direct with the capital markets,
therefore, allows corporations to avoid the unnecessary margins
imposed by such intermediaries.
 Capital structure diversification. With capital markets, the issuers
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 may obtain considerable capital from the numerous investors at ago.
This helps to reduce issue costs and time spent on organizing the sale
of securities to several investors.
 Flexible Terms: Corporate bonds have flexible interest rates, maturity
dates and repayment plans. This allows the issuers to tailor their debt
offers to match their financing needs and requirements depending on
circumstances prevailing in the market.
 Stability of ownership. Just like the case is with share issues, the
capital market debt issues enables a company to access liquidity from
the holders without the actual handover and potential alteration of
ownership.

2.2.2. “Reasons for Investors Providing Debt Funds Directly to Capital

Markets”

 Income Generation. Investors are motivated by the desire to maximize

wealth and are attracted to corporate bonds since they offer a stable
returns in the form of coupon payments.

 Diversification: In order to reduce on the risk, investors opt to diversify

their assets and investments and are attracted to corporate bonds so as
to benefit from diversification since they have different risk profiles from
those officered by other assets such as equities/government bonds.

 Corporate bonds are risky, however, they are usually believed to be more
secure than equities, even though they do carry risk. Corporate bonds
may appear charming to the prospective investors searching for a risk-
reward ratio.

 Financial institutions like the insurance companies and pension funds

which, by their nature partake sustainable and stable cash flows are
attracted to invest considerably in bonds as they principally have long
period liabilities that need to be aligned with securities with durations
and yields matching theirs. Thus, the direct investment in the capital
market helps to provide cash flow stability to investors in such
institutions, (Hakansson, 1999).

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2.2.3. “Sources of direct investments funds”
1) Insurance firms, mutual funds, Pension funds and exchange-traded
funds are some of the institutional investors. In order to expand their
income bases and control risk, they investors frequently dedicate a
portion of their portfolios to direct investments.

2) Individual savings. Some investors and individuals take part in the

CBM using saved funds. They may undertake direct investments such
as in bonds or use bond funds.

3) Foreign Investors: Globalization has enabled foreign investors to

participate in corporate bonds. The foreign investors may bring in more
liquidity and demand for the corporate bonds.

4) Corporate Treasuries: Companies usually spend their surplus funds

on purchase of corporate bonds. This might be a deliberate strategy to
generate interest on unused funds.

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2.2.4 “What Amount Would the Corporation Have Raised on the Initial
Issue of the Debentures?”
Given that;

 Initial Issue price is given as USD1,000,000

 Initial Value of Debenture is given as USD1,000,000
 The fixed half-year coupon rate is this 13% divide by 2 = 6.5%
 The half-year coupon value is thus USD1,000,000 X 0.065 =
USD65,000.00
 Annual Coupon Value, thus is the Half year value of USD 65,000X 2 =
USD130,000.00
 The number of maturity payments equals 7years x 2 (halves) = 14
Annual payments.
By discounting the annual cash flows using the present values the
corporation realized yields are follows;

“Present Value of cash flows @ 13%”

Year “Annual Cash flows” [Σ corresponding annual cash flows
(USD) × (1.13)^-n] (USD)
Year1 130,000 115,044.25
“ 2 130,000 101,809.07
“ 3 130,000 90,096.52
“ 4 130,000 79,731.43
“ 5 130,000 70,558.79
“ 6 130,000 62,441.41
“ 7 1,130,000 480,318.53
Total 1,910,000 1,000,000.00

From the above calculations, US$1,000,000 was realized from the initial
issue.

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2.2.5. Price of the Debenture After One Year
Given that;
 Initial Issue price is given as USD1,000,000
 Initial Value of Debenture is given as USD1,000,000
 The fixed half-year coupon rate is this 13% divide by 2 = 6.5%
 The half-year coupon value is thus US$1,000,000 X 0.065 =
USD65,000.00
 Half year Market Yield is given as 12% divide by 2 = 6.0%
 The number of maturity payments equals 6years x 2 (halves) = 12
Annual payments.

The computation can therefore be as follows;

“Present value of the “Present value of the half-year Sum/Total

debenture” coupon payments”
A (USD)
B

(1,000,000 × (1 +0.06)^-12) (65,000 × [1-(1+0.06)^-12]) ÷0.06 (A + B)

496,969.36 544,949.86 1,041,919.22

From the above calculations, USD.1,041,919.22 was the price of the

existing debenture in the secondary market. This, being the summation of the
present value and that of the half-yearly coupon payments over its duration,
when discounted at 12% market interest rates.

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2.2.6. “Why the Value of the Debenture has Changed”
An increase in the required rate of return (RRR) results in lower prices of
the bond and the reverse is true. This is because the bond’s yield is inversely
related to its value. In the above instance, the market rate of 12% after a
year is less than the coupon interest of 13%. That is why an increase in the
worth of the debenture in the secondary market by US$ 41,919.22 is
observed. That is (US$1,041,919.22- US$1,000,000 equals US$41,919.22).
The implication is that the debenture’s underlying value increased in reaction
to the decrease in its yield to maturity.

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3.0. Conclusion
This paper examined equity and corporate bond markets, with
discussions of several instruments that are traded in the stock markets.
Issues relating to agency relationships, rights and responsibilities of
stakeholders in a corporation and corporate governance were evaluated
because of desire for segregation of ownership and control brought about
by the corporate form of business entity. It was found out that the BODs,
while exercising their oversight role need to comes up with checks and
balances which would effectively address conflicts between the agent and
the principal in the organization.

The last part of this paper assessed the CBM or debt market,
discussing the various instruments and their respective risk-return
profiles. Why corporations get engaged in capital markets, and finally,
practical calculations that confirmed the validity of the theory that
market interest rates and bond prices are inversely related.

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