FIN 534 WEEK 10 HOMEWORK

Homework Set #5: Chapter 12

 

Suppose you decide (as did Steve Jobs and Mark Zuckerberg) to start a company. Your product is a software platform that integrates a wide range of media devices, including laptop computers, desktop computers, digital video recorders, and cell phones. Your initial market is the student body at your university. Once you have established your company and set up procedures for operating it, you plan to expand to other colleges in the area and eventually to go nationwide. At some point, hopefully sooner rather than later, you plan to go public with an IPO and then to buy a yacht and take off for the South Pacific to indulge in your passion for underwater photography. With these issues in mind, you need to answer for yourself, and potential investors, the following questions.

1. What      is an agency relationship? When you first begin operations, assuming you      are the only employee and only your money is invested in the business,      would any agency conflicts exist? Explain your answer
2. If you      expanded and hired additional people to help you, might that give rise to      agency problems?
3. Suppose      you need additional capital to expand and you sell some stock to outside      investors. If you maintain enough stock to control the company, what type      of agency conflict might occur?
4. Suppose      your company raises funds from outside lenders. What type of agency costs      might occur? How might lenders mitigate the agency costs?
5. Suppose      your company is very successful and you cash out most of your stock and      turn the company over to an elected board of directors. Neither you nor      any other stockholders own a controlling interest (this is the situation      at most public companies). List six potential managerial behaviors that      can harm a firm’s value.
6. What      is corporate governance? List five corporate governance provisions that      are internal to a firm and are under its control.
7. What      characteristics of the board of directors usually lead to effective      corporate governance?
8. List      three provisions in the corporate charter that affect takeovers.
9. Briefly      describe the use of stock options in a compensation plan. What are some      potential problems with stock options as a form of compensation?
10. What      is block ownership? How does it affect corporate governance?
11. Briefly      explain how regulatory agencies and legal systems affect corporate      governance.