QUESTION 4(20 MARKS)

(a) Describe and briefly explain Fishers Theorem

(4 marks)

(b) Agency theory is a concept used to explain the important relationships between principals and their relative agent. Agency theory arise when principals self interest conflicts with the agent and the divergence in the interest leads to the agency cost. As the CEO of the company, suggest FOUR (4) options to reduce the divergence.

(3 marks)

(e) You are interested in an investment plan that offers the following returns:

For the 1st RM30,000 you invest, you will get a return of 18 percent next year.

For the 2nd RM30,000 you invest, you will get a return of 16 percent next year.

For the 3rd RM30,000 you invest, you will get a return of 14 percent next year.

For the 4th RM30,000 you invest, you will get a return of 12 percent next year.

For the 5th RM30,000 you invest, you will get a return of 10 percent next year.

Based on your portfolio, you noticed that you have R150,000 savings deposit. However, you have to pay for a bill to Zaza & co. an amount of RM90,000.

If the current rate of interest is 11 percent p.a., based on the Fishers Theorem how can you optimise your investment and consumption decision?

(12 marks)