Managerial Finance

7

P l?-c?S? 'DN,user A aT^N,*(-l Part 5 Corporate Valuation and Governance

Suppose you decide (as did Steve fobs and Mark Zuckerberg) to start a company. Your product is a softrvare platforrn that integrates a wide range of media devices, including

Iaptop computers, desktop computers, digital video recorders, and cell phones. Your initial market is the stuelent body at your university. Once you have established your company and set up procedures for operating it, 1'ou 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 ynur passion tbr underwater photography. With these issues in mind, you need to answer fclr yourself, and potenti;rl investors, the following questions.

a" 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 anv agency

conflicts exist? Explain your answer. b. If you expanded and hired additional people to help you, might that give rise to

agency problems? c. 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 ager-rcy conflict might occur?

d Suppose your company raises funds from outside lenders. What type of agency costs might occur? How rnight lenders mitigate the agency costs?

e. 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 otl.rer stockholders o1{'n a controlling interest (this is the situation at most public

companies). List six potential managerial behaviors that can harm a firm's value.

f. What is corporate governance? List five corporate governance provisions that are internal to a firm and are under its control.

g. What characteristics of the board of directors usually leacl to effective corporate governance?

h. List three provisions in the corporate cirarter that atTect takeovers. i. Briefly describe the use of stock options in a compensation p1an. What are some

potential probiems with stock options as a form of compensation? j. What is block ownership? How does it affect corporate governance? k. Briefly explain how regulatory agencies and 1ega1 systems affect corporate

governance.