Mini Case

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Chapter 13: Corporate Governance Mini Case
Book Title: Financial Management: Theory and Practice
Printed By: Gregory Dayes ([email protected])
© 2020 Cengage Learning, Cengage Learning

Chapter Review

Mini Case

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.

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 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 agency conflict 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 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.

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

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

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h. List three provisions in the corporate charter that affect takeovers.

i. Briefly describe the use of stock options