Homework Set #5: Chapter 12

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Homework Set #5: Chapter 12
Due Week 10 and worth 100 points

Directions: Answer the following questions on a separate document.
Explain how you reached the answer or show your work if a mathematical
calculation is needed, or both. Submit your assignment using the
assignment link above.

In your own words, complete the Mini-Case on Page 562 of your textbook.

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

  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
  10. What is block ownership? How does it affect corporate governance?
  11. Briefly explain how regulatory agencies and legal systems affect corporate governance.

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