【正文】 ctive ? Principalagency problem: management private benefits such as perks or slack off ? Solutions: dividends or stock repurchases monitoring: collude between auditor and manager such as Enron and Arthur Anderson incentive pensation All solutions are imperfect Internal capital MKT theory ? The traditional capital budgeting paradigm if a project should invest: positive NPV rule what to do when facing budgeting limitation: select the set offering the highest Total NPV ? Limitations of traditional paradigm why is capital budget limited? who and how is the forecast of PV made? what are the roles of headquarters and division managers Internal capital MKT (ICM) theory ? The advantages of ICM avoid the infor. asymmetry increased monitoring incentives better asset redeployability ? Pecking order theory Internal capital New issue of equity debt Internal capital MKT (ICM) theory pecking order theory Smith CO. Jones CO. True value could be higher,say $120 $120 Best current estimate 100 100 True value could be lower,say 80 80 Now both panies need new fund to invest. Smith’s financial manager think: sell stock for $100 per share? It’s worth at least $120. A stock issue now would hand a free gift to new investors. Jones’s manager with a different mood: export mkts are OK for now,but how are we foing to pete with those new Siberian ranches? Fortunately the stock price has held up pretty wellwe’ve had some good shortrun news for the press and analysts. Now’s the time to issue stock! Internal capital MKT (ICM) theory pecking order theory ? Now suppose there are two press releases: Smit