12/4/2018 Strayer University Bookshelf: ACP Financial Theory & Practice
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A restricted voting rights provision automatically deprives a shareholder of voting rights if he or she owns more than a speci�ied amount of stock.
Interlocking boards of directors occur when the CEO of Company A sits on the board of Company B and B’s CEO sits on A’s board.
A stock option provides for the purchase of a share of stock at a �ixed price, called the exercise price, no matter what the actual price of the stock is. Stock options have an expiration date, after which they cannot be exercised.
An Employee Stock Ownership Plan (ESOP) is a plan that facilitates employees’ ownership of stock in the company for which they work.
Questions (13-1)
De�ine each of the following terms:
a. Agent; principal; agency relationship
b. Agency cost
c. Basic types of agency con�licts
d. Managerial entrenchment; nonpecuniary bene�its
e. Greenmail; poison pills; restricted voting rights
f. Stock option; ESOP
(13-2)
What is the possible agency con�lict between inside owner/managers and outside shareholders?
(13-3)
What are some possible agency con�licts between borrowers and lenders?
(13-4)
What are some actions an entrenched management might take that would harm shareholders?
(13-5)
How is it possible for an employee stock option to be valuable even if the �irm’s stock price fails to meet shareholders’ expectations?
12/4/2018 Strayer University Bookshelf: ACP Financial Theory & Practice
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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 Paci�ic 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 �irst begin operations, assuming you are the only employee and only your money is invested in the business, would any agency con�licts exist? Explain your answer.
12/4/2018 Strayer University Bookshelf: ACP Financial Theory & Practice
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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 con�lict 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 �irm’s value.
f. What is corporate governance? List �ive corporate governance provisions that are internal to a �irm and are under its control.
g. What characteristics of the board of directors usually lead to effective corporate governance?
h. List three provisions in the corporate charter that affect takeovers.
i. Brie�ly 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. Brie�ly explain how regulatory agencies and legal systems affect corporate governance.
12/4/2018 Strayer University Bookshelf: ACP Financial Theory & Practice
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PRINTED BY: [email protected]. Printing is for personal, private use only. No part of this book may be reproduced or transmitted without publisher's prior permission. Violators will be prosecuted.
