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Agency relationship

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.This course requires the use of Strayer Writing Standards. For assistance and information, please refer to the Strayer Writing Standards link in the left-hand menu of your course. Check with your professor for any additional instructions.

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:

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

Sample Solution

developed by Markowitz (1952) and suggests that an investor can build a portfolio of multiple assets that will maximise returns for a given level of risk. If the maximum return, whilst being exposed to the least risk, could be achieved through domestic markets there would be no need for foreign exposure. In fact, it is argued that international investing is used more to reduce risk than to seek out a higher return. Goetzmann, Li and Rouwenhorst (2002) state that “one of the most well-known results in finance is the decrease in portfolio risk that occurs with the sequential addition of stocks to a portfolio”. Currency volatility The single most important consideration when investing in either of these markets is currency risk. As of today (20th October 2016), the Pound has fallen 19% against the dollar and 15% against the Euro (FT, 2016) which makes purchasing stocks in these countries considerably more expensive than pre-Brexit. Source: Myforexchart (2016) The consideration is therefore expectation of further opportunity given the current trend downwards in the lead up to invoking Article 50 or threat of a rebound. A rebound would devalue any overseas equity growth whereas a further decline would inflate any gains. As the methodology of Brexit is yet to be determined, the Pound against both the Dollar and Euro continues to experience high volatility. Shortly after the referendum, the Financial Times asked several experts to forecast the effect on the pound against the dollar. The lowest forecast, given the information at that point was $1.15. As of 20 October 2016, it’s $1.20. (Blitz, McCrum and Mackenzie, 2016). The difficult decision here is based on the total obdurate lack of uncertainty. The currency will continue to be volatile until a clear direction for exit is determined. This uncertainty is evidenced by HSBC who currently forecast that the pound will fall to $1.10 and parity against the Euro by the end of 2017 (Nag and Graham, 2016), whilst Mnyanda (2016) thinks a hard Brexit has already been priced in and the pound could rally 5%.
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