3 POSITIVE ACCOUNTING THEORY Part A: Credit crunch in small business lending Glen Otto. associate professor of
Question:
3 POSITIVE ACCOUNTING THEORY
Part A: Credit crunch in small business lending
Glen Otto. associate professor of the school of economics at UNSW Australia Business School says the threat of a credit crunch for small business funding is real.
"A large percentage of SME (small-medium-enterprise) finance comes via bank lending " Otto says.
"Corporates have other sources of funds, but SMEs do not. Therefore, if there was a tightening of rules around lending to small businesses, they wouldn't have many outside options. That would have a significant effect on these enterprises."
Required:
To reduce their lending risk, briefly outline:
a) two conditions which commercial banks should include in their loan agreements with SMEs.
b) The specific agency problems that each condition in (i) above is designed to reduce.
Part B:
Company X has recently appointed a new CEO. Apart from her base salary, she is also entitled to a bonus from company profits.
Required:
a) Using the agency theory, explain why the CEO is paid a base salary.
b) The CEO may try to maximize her bonus at the expense of the company's long-term future. Suggest how shareholders can discourage such behavior.
c) Briefly outline how the CEO's behavior will be constrained by the market for managers.
Part C:
Company Y provides telecommunication services throughout the country. It has reported profits in excess of 20 million for the last few years.
Required:
a) Using the political cost hypothesis, predict how company Y may reduce the threat of special taxes.
b) Apart from special taxes, briefly outline 2 political costs which may be imposed on company Y.
Income Tax Fundamentals 2013
ISBN: 9781285586618
31st Edition
Authors: Gerald E. Whittenburg, Martha Altus Buller, Steven L Gill