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SECTION B ANSWER ANY TWO (2) QUESTIONS QUESTION 2 [30 MARKS] The Enron Scandal One particularly famous example of the agency problem is that of Enron. Enron's directors had a legal obligation to protect and promote investor interests but had few other incentives to do so. But many analysts believe the company's board of directors failed to carry out its regulatory role in the company and rejected its oversight responsibilities, causing the company to venture into illegal activity. The company went under following an accounting scandal that resulted in billions of dollars in losses. Enron was, at one point, one of the largest companies in the United States. Despite being a multi-billion-dollar company, Enron began losing money in 1997. The company also started racking up a lot of debt. Fearing a drop in share prices, Enron's management team hid the losses by misrepresenting them through tricky accounting-namely special purpose vehicles (SPVS), or special purposes entities (SPES)-resulting in confusing financial statements. The problems started to unfold in 2001. There were questions about whether the company was overvalued, leading to a drop-in share prices from over $90 to under $1.1 The company ended up filing for bankruptcy in December 2001. Criminal charges were brought up against several key Enron players including former chief executive officer (CEO) Kenneth Lay, chief financial officer (CFO) Andrew Fastow, and Jeffrey Skilling, who was named CEO in February 2001 but resigned six months later. (a) Explain the agency problem and discuss how agency problems between shareholders and management might be controlled and reduced. [15 marks] XYZ Inc. is starting the project at a cost of $ 100,000. The project will generate cash-flow of $ 40,000 $50,000 & $ 50,000 in year 1, year 2 & year 3 respectively. The company's WACC is 10%. (b) Find out NPV. (c) Do you think it is a worthwhile investment? [4 marks] [2 marks] (d) Discuss how the net present value method of investment appraisal contributes towards the objective of maximising the wealth of shareholders. (9 marks] Page 9 of 12