Homework Set #3

Due Week 6 and worth 75 points

Directions: Answer the following questions in 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.

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 client base 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 plans in mind, you need to answer for yourself, and potential investors, the following questions:

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. Suppose your company raises funds from outside lenders. What type of agency costs might occur? How might lenders mitigate the agency costs?
3. What is corporate governance? List five corporate governance provisions that are internal to a firm and are under its control.
4. Briefly describe the use of stock options in a compensation plan. What are some potential problems with stock options as a form of compensation?
5. Briefly explain how regulatory agencies and legal systems affect corporate governance.