Case Study Series
Government Ownership and Monitoring Issue
A higher cost of capital jointly with a decrease in stock price does not create value for the
shareholders. Since the govemrnent owns 56% of the 600,000 shares of Agthia Group
(through Senaat General Holding Coqmralion (51%) and Abu Dhabi Retirement Pensions &
Bene/its Fund (5%)), there is a negative valuation effect for the government.
The financial literature on goveminent ownership shows that this type of ownership does not
necessarily help the companies to perfonn. From a financial point of view, the govemment
offers an implicit financial guarantee as a main owner of the limi. This helps the f’u’m,
specifically s|art»up firms as was the case of Agthia in 2004, to earn a market share and to get
established in the sector. However, the government has to implement the appropriate
mechanisms in order to improve the performance of the finn.
Questions for Discussion
In relationship with the three concems presented in the first section: (1) cost of capital, (2)
corporate govemance, and (3) monitoring and large shareholders’ activism,
l, How do Agthia Group is performing in comparison with its peers? Use case data to justify
the answer.
2, How Agthia Group’s stock price is evolving thought time?
3, Compute the overall cost of capital given the cost of equity, the Cost of debt, and the
proportions of total assets financed by debt and equity, Show procedure and computations.
4. What is the impact of Agthia’s merger and acquisition strategy on its overall cost of
capital. Discuss this issue in relationship with the risk-retum trade-off principle.
5. How corporate govemance inefficiencies can impact the cost of capital? Discuss this issue
relationship with agency theory.
6. l-low can we reduce the cost of capital? Refer to agency theory in your discussion.
7. l-low the govemment can reduce agency costs and maximize finn value?
Instructions:
1. Answer questions in the order they appear.
2. Show procedures for calculations.
3. Do research on the principles and theories mentioned in the case in
order to justify your answer and include the list of references used
in each question.
