The key factors that must be considered when determining external financing requirements include:

• The amount of money that the business needs to raise. This will depend on the business’s growth plans and its current financial situation.
• The cost of external financing. The cost of external financing will vary depending on the type of financing that the business chooses.
• The availability of external financing. The availability of external financing may be limited, depending on the current economic conditions.
• The risk of external financing. External financing can be risky, especially if the business is unable to repay the debt.

Agency Conflicts

Agency conflicts occur when the interests of the managers of a company are not aligned with the interests of the shareholders. This can happen for a number of reasons, such as when managers have different goals than shareholders, or when managers have more information than shareholders.

There are three main types of agency conflicts:

• Self-serving behavior: This occurs when managers act in their own best interests, even if it is at the expense of the shareholders. For example, managers may take excessive salaries or bonuses, or they may make decisions that benefit themselves but harm the company.
• Shirking: This occurs when managers do not work as hard as they could, or when they take unnecessary risks. For example, managers may take long vacations or they may invest in risky projects that are not in the best interests of the company.
• Information asymmetry: This occurs when managers have more information than shareholders. This can give managers an advantage, as they can use this information to make decisions that benefit themselves but harm the shareholders.

An example of self-serving behavior is when a CEO takes a large salary increase, even though the company is not doing well financially. This is because the CEO is acting in his own best interests, even though it is at the expense of the shareholders.

An example of shirking is when a manager takes a long vacation during a busy time for the company. This is because the manager is not working as hard as he could, which is harming the company.

An example of information asymmetry is when a manager knows that a company is about to announce bad news, but he does not tell the shareholders. This is because the manager is using his information to his advantage, even though it is harming the shareholders.

Agency conflicts can be costly for businesses. They can lead to decreased profits, decreased shareholder value, and even bankruptcy. There are a number of ways to mitigate agency conflicts, such as by having strong corporate governance practices, by setting clear performance goals for managers, and by providing incentives for managers to act in the best interests of the shareholders.