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FINM7402 Tutorial 1 Question (Updated)

1. What does the phrase limited liability mean in a corporate context?

2. You have decided to form a new start-up company developing applications for the iPhone. Give examples of the three distinct types of financial decisions you will need to make.

3. Corporate managers work for the owners of the corporation. Consequently, they should make decisions that are in the interests of the owners, rather than their own. What strategies are available to shareholders to help ensure that managers are motivated to act this way?

4. Suppose you are considering renting an apartment. You, the renter, can be viewed as an agent while the company that own the apartment can be viewed as the principal. What principal agent conflicts do you anticipate? Suppose, instead, that you work for the apartment company. What features would you put into the lease agreement that would give the renter incentives to take good care of the apartment?

5. You are the CEO of a company and you are considering entering into an agreement to have your company buy another company. You think the price might be too high, but you will be the CEO of the combined, much larger company. You know that when the company gets bigger, your pay and prestige will increase. What is the nature of the agency conflict here and how is it related to ethical considerations?

6. What inherent characteristic of corporations creates the need for a system of checks on manager behaviour?

7. What is the role of the board of directors in corporate governance?

8. What role do security analysts play in monitoring?

9. How are lenders part of corporate governance?

10. Is it necessarily true that increasing managerial ownership stakes will improve firm performance?

11. What are a board’s options when confronted with dissident shareholders?

12. What is the essential trade-off faced by government in designing regulation of public firms?

13. Briefly differentiate between adverse selection and moral hazard with relevant examples.

14. Define the term “board independence”. What are the three tests suggested by the Calpers to identify an independent board?

15. Why does board independence matter? Does it always lead to better firm performance?

16. Define the term “captured board,” and describe situations in which a board is most likely to be captured.

17. Is there any relationship between Board Size and firm performance?

18. It is argued that incentive-based compensation will alleviate agency problems between managers and owners. Therefore, many companies adopt compensation policies that include grants of stock or stock options to executives. Could this strategy, however, have any adverse consequences?

19. How do institutional investors influence corporate governance of firms?

20. Briefly explain the concept of new stakeholder model and how could it affect firms?