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hello sir, this question was in acca practice platform practice exam 1
in this question it was mentioned that “The directors believe that this investment project will increase shareholder wealth if it achieves a return on capital employed greater than 15%. As a matter of policy, the directors require all investment projects to be evaluated using both the payback and return on capital employed methods. Shareholders have recently criticised the directors for using these investment appraisal methods, claiming that Fence Co ought to be using the academically-preferred net present value method.”
Which of the following statements about Fence Co is/are correct?
Managerial reward schemes of listed companies should encourage the achievement of stakeholder objectives
Requiring investment projects to be evaluated with return on capital employed is an example of dysfunctional behaviour encouraged by performance-related pay
Fence Co has an agency problem as the directors are not acting to maximise the wealth of shareholders
answer is 1,2 3….. how come 3 is correct when its written they are taking decision in relation to maximixation of shareholder wealth
It is because what the directors believe is not true. Share prices are determined by the present value of future dividends and to increase shareholders wealth they should be using an NPV approach to appraise investment projects.