This document discusses agency costs related to free cash flow, corporate finance, and takeovers. It aims to investigate how debt can reduce agency costs by limiting manager discretion over free cash flow, and how takeovers can better utilize free cash flow compared to diversification. The study will examine the effects of debt on agent performance and dividends using free cash flow as a measurement tool. It will focus on listed oil companies, with limitations including financial resources, time constraints, and free cash flow restrictions. The methodology will use a quantitative deductive approach analyzing time series data from 2000-2014 on variables like return on capital, inflation, money supply, and free cash flow.

1. Agency Costs of Free Cash Flow, Corporate Finance, and
Takeovers
Topic
Presented by
Syed M Humza Hussain ID:12544

2. 1. Introduction
The core purpose of the organization is to maximize the shareholder wealth. In
every Public Limited company the owners of the business are separate entity
from the business they hired person to do business on their behalf here the
problem of agent begins when you hired a person to do business he first secure
himself and then for the company owners/shareholders. Free cash flow is the
power measuring tool of company.
 Internal Factors: Internal Financing or Free Cash Flow, Dividend Policies.
 External Factors: External Financing or Financial Institution, Industry
growth and government policies.

3. 1.1 Research Problem
 To find out the factors to that can reduce agent discretion
to use free cash flow in form of investment and to find the
role of financial institution in monitoring companies
performance.

4. 1.1 Research Questions
 How debt reduce agency costs of free cash flows?
 How debt can substitute for dividends?
 Why takeover is better option than diversification when you
have a large number of free cash in the company?

5. 1.2 Research Objectives
 This study is to investigate the positive NPV investment
program for investment by use of FCF as a measuring tool.
 To examine effects of the debt to improve agent performance
and to avoid dividends.
 The study is conducted for the stakeholders: corporate sectors,
organizations, corporate agent etc to get ease to understand the
factors of diversification or takeover and this will help them to
make decisions on what level of FCF they should takeover or go
for other means to utilize FCF.

6. 1.3 Limitations
The study will be limited only to listed oil Industry in world. This
has incited the analyst to take his research FCF Hypotheses
Financial Restrain
Free cash Flow Restrain
Time Restrain

7. 2. Literature Review
• J. Service Science & Management, ……………….(2010)
• Gerald T. Garvey faculty of economics, Australian University,
Canberra, Australia: Managerial and Decision Economics Vol,
16, 37-46 ………………………………………….(1995)

8. 2.1 Haussman's Test
Free Cash Flow to analyze and forecast the fluctuations of internal
and external factors of investment variables impact on oil industry.
Dependent Variables and Their Assessment
Variables Name Assessments
ROIC Return on invested capital Net income-dividend/Total capital
ROA Return on Assets Net Income/Total Assets
Independent Variables and Their Assessment
Variables Name Assessments
INF Inflation Rate Annual Annual% change in consumer price index
MS Money supply Change in Reserves * Money Multiplier
FCF Free Cash Flow Operating income – Capital expenditure

9. 3. Research Methodology
 Research Design
 Philosophy: Positivist
 Approach: Deductive
 Research Choice: Mono – Method (Quantitative)
 Time Horizon: Time Series Data
 Data: Took sample of 11 commercial banks in Pakistan from
2000-2014
 Software Employed: EViews 5.1

10. Thankyou