Question

11:36 + UE Notes February 15, 2020 at 10:59 AM 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:

Answer 1

1. An agency relationship is a fiduciary relationship, where one person (called the “principal”) allows an agent to act on his or her behalf. The agent is subject to the principal's control and must consent to his orders.

Yes, in such cases where the company is a legal entity without any existence, the owner who is the only employee acts on its behalf as an agent. And as the agency relationship goes, the principal is liable for all the actions of the agent. So any conflicts or misuse of resources by the agent, the company will be liable for it.

2. The primary costs that occur are the financing costs, i.e. the interest which has to be paid to the lender along with the principal amount. The benefit from raising funds from lenders vis-a-vis equity is that the capital of the company is preserved and leverage helps to expand the business

3. Corporate governance is the system of internal controls and procedures which helps to manage a company. Its aim is to establish the rights and obligations of various groups within the company and to minimize potential conflicts of interest between insiders and external shareowners. 5 corporate governance provisions are:

• Monitoring by board
• Internal audits and robust policies
• Proper balance of power
• Performance-based remuneration
• Monitoring by large shareholders and other stakeholders

4.

Employers often offer stock options as part of an employee's overall compensation package. The stock options can help an employee to work with more dedication and motivation since good performance of the company will increase the value of the share. And sometimes, your stock options could end up being more valuable than your salary (especially if you join a company early and it takes off). Some potential problems are that Stock options aren’t actual shares—they’re the opportunity to exercise (purchase) a certain amount of company shares at an agreed-upon price, called your grant, strike, or exercise price. The hope is you get to sell your purchased shares for more than you paid for them. However, you’re never required to exercise—that’s why they’re called options.

5. Legal authorities and regulators are a part of the stakeholders of a company. While these are the external factors to corporate governance, a company has to be sure to abide by the respective laws of the country where it's registered.

A regulator for example SEC may want a US Publicly listed company to submit the appropriate forms like form-D, 10-K and the 10-Q etc and not following the rules might attract hefty penalties. Another example could be getting the financial statements audited by an independent firm to ensure its verifiability and accuracy.

Whereas, legal system sets the rules for the company in which it has to operate. In the wake of disasters such as Enron and WorldCom, it is more important than ever to ensure companies have the right checks and balances in place to avoid wholesale fraud or abuse of office. The roles of boards of directors, board committees, individual directors, and executive officers have always been challenging. Congress, the Securities and Exchange Commission, and the stock exchanges have expanded materially the responsibilities of directors and executive officers of public companies and imposed upon them significant potential liabilities.