Advanced corporate finance 454 exam #1
If you are the only employee, and only your money is invested in the business,
would any agency
problems exist? - ANS No agency problem would exist. A potential agency
problem arises whenever the manager of a firm owns less than 100 percent of
the firm's common stock, or the firm borrows. You own 100 percent of the firm.
If you expanded and hired additional people to help you, might that give rise to
agency problems? - ANS An agency relationship could exist between you and
your employees if you, the principal, hired the employees to perform some
service and delegated some decision-making authority to them.
If you needed additional capital to buy computer inventory or to develop
software, might that lead to agency problems? - ANS Acquiring outside
capital could lead to agency problems. How? Asymmetric information before
obtain the loan; moral hazard problem after obtain the loan.
Would it matter if the new capital came in the form of an unsecured bank loan,
a bank loan secured by your inventory of computers, or from new
stockholders? - ANS Agency problems are less for secured than for
unsecured debt, and different between stockholders and creditors.
There are 2 potential agency conflicts: - ANS Conflicts between stockholders
and managers.
, Conflicts between stockholders and creditors.
Would potential agency problems increase or decrease if you expanded
operations to other campuses? - ANS Increase. You could not physically be at
all locations at the same time. Consequently, you would have to delegate
decision-making authority to others.
If you were a bank lending officer looking at the situation, what actions might
make a loan feasible? - ANS Creditors can protect themselves by (1) having
the loan secured and (2) placing restrictive covenants in debt agreements.
They can also charge a higher than normal interest rate to compensate for
risk.
Agency costs borne by stockholders - ANS Expenditures to monitor
managerial actions, such as audit costs
Expenditures to structure the organization to limit undesirable managerial
behavior
Opportunity costs incurred when timing of the decision making is affected
As the founder-owner-president of the company, what actions might mitigate
your agency problems if you expanded beyond your home campus? - ANS
Structuring compensation packages to attract and retain able managers whose
interests are aligned with yours.
2. Threat of firing.
If you are the only employee, and only your money is invested in the business,
would any agency
problems exist? - ANS No agency problem would exist. A potential agency
problem arises whenever the manager of a firm owns less than 100 percent of
the firm's common stock, or the firm borrows. You own 100 percent of the firm.
If you expanded and hired additional people to help you, might that give rise to
agency problems? - ANS An agency relationship could exist between you and
your employees if you, the principal, hired the employees to perform some
service and delegated some decision-making authority to them.
If you needed additional capital to buy computer inventory or to develop
software, might that lead to agency problems? - ANS Acquiring outside
capital could lead to agency problems. How? Asymmetric information before
obtain the loan; moral hazard problem after obtain the loan.
Would it matter if the new capital came in the form of an unsecured bank loan,
a bank loan secured by your inventory of computers, or from new
stockholders? - ANS Agency problems are less for secured than for
unsecured debt, and different between stockholders and creditors.
There are 2 potential agency conflicts: - ANS Conflicts between stockholders
and managers.
, Conflicts between stockholders and creditors.
Would potential agency problems increase or decrease if you expanded
operations to other campuses? - ANS Increase. You could not physically be at
all locations at the same time. Consequently, you would have to delegate
decision-making authority to others.
If you were a bank lending officer looking at the situation, what actions might
make a loan feasible? - ANS Creditors can protect themselves by (1) having
the loan secured and (2) placing restrictive covenants in debt agreements.
They can also charge a higher than normal interest rate to compensate for
risk.
Agency costs borne by stockholders - ANS Expenditures to monitor
managerial actions, such as audit costs
Expenditures to structure the organization to limit undesirable managerial
behavior
Opportunity costs incurred when timing of the decision making is affected
As the founder-owner-president of the company, what actions might mitigate
your agency problems if you expanded beyond your home campus? - ANS
Structuring compensation packages to attract and retain able managers whose
interests are aligned with yours.
2. Threat of firing.
