Read the Chapter 13 Mini Case in Financial Management: Theory and Practice. Complete Parts 1 and 2.
Part 1: Using complete sentences and academic vocabulary, please answer questions a through d.
Part 2: Using the mini case information, write a 250-word letter of intent discussing specific strategies for how you will conduct your start-up business with personal and professional integrity.
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Chapter 13: Corporate Governance Mini Case
Book Title: Financial Management: Theory and Practice
Printed By: Gregory Dayes (GDayes@my.gcu.edu)
© 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 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 corporate
governance.
Chapter 13: Corporate Governance Mini Case
Book Title: Financial Management: Theory and Practice
Printed By: Gregory Dayes (GDayes@my.gcu.edu)
© 2020 Cengage Learning, Cengage Learning
© 2023 Cengage Learning Inc. All rights reserved. No part of this work may by reproduced or used in any form or by any means –
graphic, electronic, or mechanical, or in any other manner – without the written permission of the copyright holder.
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