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Agency relationship

Question 1 At year-end 2018, Marvel Company total assets were $4.5 million, and its accounts payable were $850,000. Sales, which in 2018 were $5.5 million, are expected to increase by 25% in 2019. Total assets and accounts payable are proportional to sales, and that relationship will be maintained. Marvel typically uses no current liabilities other than accounts payable. Common stock amounted to $ 2.25 million in 2018, and retained earnings were $150,000. Marvel has arranged to sell $25,000 of new common stock in 2019 to meet some of its financing needs. The remainder of its financing needs will be met by issuing new long-term debt at the end of 2019. (Because the debt is added at the end of the year, there will be no additional interest expense due to the new debt.) Its net profit margin on sales is 2.5%, and 55% of earnings will be paid out as dividends.

a. What were Marvel’s total long-term debt and total liabilities in 2018?

b. How much new long-term debt financing will be needed in 2019? (Hint: AFN – New stock = New long-term debt.)

Question 2 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.

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.
If you expanded and hired additional people to help you, might that give rise to agency problems? Explain your answer
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?
Suppose your company raises funds from outside lenders. What type of agency costs might occur? How might lenders mitigate the agency costs?
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.
What is corporate governance? List five corporate governance provisions that are internal to a firm and under its control. What characteristics of the board of directors usually lead to effective corporate governance?
List three provisions in the corporate charter that affect takeovers.
Briefly describe the use of stock options in a compensation plan. What are some potential problems with stock options as a form of compensation?
What is block ownership? How does it affect corporate governance?
Briefly explain how regulatory agencies and legal systems affect corporate governance.

Sample Solution

ullion from leaving the kingdom, but high prices in Spain made it a good market for outside products. Spanish industry declined in the 16th century, in part because of the sales taxes imposed by the crown, which necessitated more buying of foreign merchandise. Great quantities of bullion had to be poured out to finance the expensive Spanish European empire and the costly wars and diplomacy of Charles V and Philip II, both of whom were constantly in debt. Price rises followed in other countries, largely from the influx of Spanish bullion. In England, where some statistics are available, costs by 1650 had risen by 250 percent over those of 1500. The European commercial revolution, which brought increased industry, more trade, and larger banks, had begun before the discoveries, but it received stimulus from them. Bullion from America helped create a money economy, replacing the older and largely barter exchange—a trend accentuated by greater European mineral production in the early 16th century. The trade emporiums of Italy and the Baltic Hanseatic League declined and were largely replaced by those of the Dutch Republic, England, and France. Joint-stock companies made an impressive appearance, notably the East India Companies of the Dutch Republic, England, and France in the 17th century. The mercantile theory that precious metals constitute the true wealth, though it had attracted advocates for a long time, now came into full vogue and continued to dominate economic thinking. Discovery introduced Europe to new foods and beverages. Coffee, from Ethiopia, had been consumed in Arabia and Egypt before its wide European use began in the 17th century. Tobacco, an American plant smoked by Indians, won an Old World market despite many individual objectors; the same proved true of chocolate from Mexico and tea from Asia. The South American potato became a staple food in such places as Ireland and central Europe. Cotton, from the Old World, took firm root in the New, from which Europe received an enormously increased supply. Sugar, introduced to the American tropics, along with its molasses and rum derivatives, in time became the principal exports of those regions. Spice was certainly more plentiful than before the discoveries, though the Dutch, when they controlled the East Indies, were able to limit production and thus to keep the price of cloves and nutmegs high. The influence of the discoveries permeated literature. Sir Thomas More’s Utopia, printed in 1516 and dealing with an imaginary island, was suggested by South America. The Portuguese poet Luís de Camões recounted the voyage of Vasco da Gama, though fancifully, in epic verse. Michel de Montaigne discoursed upon American savages, some of whom he had seen in France. Christopher Marlowe’s drama Tamburlaine (1587), though based on the life of the Asiatic conqu
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