QUESTION TWO (15 MARKS)

1. There is a conflict of interest between stockholders and managers. In theory, stockholders are expected to exercise control over managers through the annual meeting or the board of directors. In practice, why might these disciplinary mechanisms not work? (3 marks)
2. Stockholders can transfer wealth from bondholders through a variety of actions. Explain three (3) key actions that stockholders can undertake to transfer wealth from bondholders. (3 marks)
3. A project with an initial cost of GH 500,000 has the following forecasted cash inflows:

Year	Cashflows (GH)
1	150,000
2	200,000
3	250,000
4	300,000
5	320,000

The estimated project beta is 1.2. The market return is 19%, and the risk-free rate is 10%.

Required:

1. Compute the opportunity cost of capital and the projects Present Value (2 marks)
2. Indicate the annual Certainty Equivalent cash flow to the expected cashflow in each case? (2 marks)
3. What is the ratio of Certainty Equivalent cashflow to the expected cashflow in each case? (2 marks)
4. What is the meaning of this ratio? (2 marks)
5. Why does this ratio declines? (1 marks)