Using the mini case information below write a 250-500 word letter of intent discussing specific strategies for how you will conduct your start-up business with personal and professional integrity.
these are the questions that are answered above!
(a) An agency relationship would occur when an individual or group or company who is called the principal, hires someone who is called an agent to perform some useful service as required by the principal. The principal also delegates the decision making power to the agent. Important agency relationships include between stock holders and the creditors, owners or managers and shareholders and stockholders and the managers. Initially when no outsiders money is involved, then there would be no conflict. Since, here in this case there is no external agency and there is no such type of agency relationship. So, no agent conflict would exist (b) Yes, if the firm is expanded and additional people are hired, this would give rise to agency problems. The employees would perceive that the owners would benefit a lot from the profits earned by the organization and the employees would be extended with the normal salary what they get. This would create a conflict between the owner and the employees This conflict increases when the shares of company are sold to outsiders, new top-level management is introduced, etc. (C) in case additional stock is sold to the outsiders and a major portion of the shareholding remains with the owner then there will be a conflict between the shareholders and the owner The major decision is taken by the major shareholder, in this case, the owner, there is possibility of prejudice while making decisions. The decisions taken may not favor the investors This leads to owner and outside owner conflict. It occurs mainly when the goals of investors and owner mismatch or when the decision taken by top management is misunderstood by the investors (d) Suppose, the company raise funds from outside lenders, then there would be the conflict between borrower and lenders who are the creditors of the company. Assuming the company invests the money in a targe new good project which is risky The outcome of the new project might be extremely profitable or also might lead to bankruptcy If it is successful then the benefits go to the shareholders. But the creditors get a fixed rate of interest at a low nisk rate which had been set while borrowing money. Now, if the project does not work out, and then the creditors take the loss Hence, the increased risk due to the asset change will cause an increase in the required rate of return on the debt is resulting the value of the outstanding debt to fall A similar situation will occur if the firm borrows and then issues additional debt and using the proceeds to purchase some of the outstanding stock Hence, this activity increases its financial leverage. Under favorable conditions the shareholders will gain from the increased leverage There can be a decrease in the value of debt, because now there will be larger amount of debt backed by the same amount of assets. In both the asset and the increased leverage situations stock holders have the potential of gaining, but such gains are made at the expense of the creditors Benchmark - Mini Case 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. a. 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. 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 conflict might occur? H. Suppose your company raises funds from outside lenders. What type of agency costs might occur? How might lenders mitigate the agency costs
