TNT Ltd has a paid up share capital of 1.2 million shares of Sh.20 each. The current market price per share is Sh.36. The company has no loan capital. Maintainable earnings before tax are forecast at Sh.4.8 million. The companys effective tax rate is 40%. The company requires to raise a further Sh.15 million in order to achieve additional earnings of Sh.2.2 million per year and proposes doing this by means ofa rights issue. Suggested alternative prices for the rights issue are Sh.32 and Sh.25 per share.

1. 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.
2. If you expanded and hired additional people to help you, might that give rise to agency problems? Explain your answer
3. 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?
4. Suppose your company raises funds from outside lenders. What type of agency costs might occur? How might lenders mitigate the agency costs?
5. 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.
6. 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?
7. List three provisions in the corporate charter that affect takeovers.
8. Briefly describe the use of stock options in a compensation plan. What are some potential problems with stock options as a form of compensation?
9. What is block ownership? How does it affect corporate governance?
10. Briefly explain how regulatory agencies and legal systems affect corporate governance.