In your own words, complete the mini case on 562 of textbook.
Textbook Financial Management Theory and Practice
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 any agency conflicts exist? Explain you answer
b) If you expanded and hired additional people to help you, might this 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 agency might occur.
d) Suppose your company raises funds from outside lenders. What type of agency costs might occur? How might lenders mitigate the agency costs
e) Suppose your company is very successful and you cash out most pf 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.
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 lead to effective corporate governance?
h) List three provisions in the corporate charter that affect takeovers.
i) Briefly describe the use of stock options in a compensation plan. What are some potential problems 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 legal systems affect governance.
The start-up will be media devices to be sold on college campuses locally and nationally later.
Explanation & Answer
Answers to the questions
An agency relationship is a fiduciary where the actions of an agent are exchanged with a
third party. It results from a consent from one party to the other that a third party shall act on
behalf of the first party. In this case, there is no agency conflict. This is mainly because agency
conflict arises when the proprietor owns less than 100% of the common stock of the business.
Here, the owner is the only employee, and the entire company belongs and is owned by you thus
presenting a 100% ownership of the entity.
The expansion of the business and the hiring of more workers will raise agency problems.
This is because an agency relationship will arise between you and the employee if you hire him
or her to execute some duti...
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