Question 1.
Internal funds are obtained from the retention of earnings. If firms require external financing, the financial managers can structure equity or debt to finance a firm’s operations. Equity represents ownership interests and can be either common or preferred stock. Debt is money borrowed from creditors.
Intermediaries serve the role of servicing savers and borrowers to achieve their desired pattern of inter-temporal consumption. Instead of savers and borrowers having to deal with each other on an individual basis, they deal with the intermediary. The intermediary realizes a profit by lending at a higher rate than it pays savers (the spread).
For the Scenario below, you are the CFO. Share with us what you explaining to your fellow C suite members and the board of directors.
Scenario:
Boudin Wireline Services, Inc. in Estelle, Louisiana is contemplating an acquisition of Lagniappe Consulting, LLC, a complimentary company based in Lafayette, Louisiana. Boudin is an S Corporation and Lagniappe is a limited liability company. The venture capitalist believe the structure of both companies is not correct to do an initial public offering of $100 million. The venture capital firm has suggested a C corporation. The venture capitalist will be taking an equity kicker in the deal, three board seats, and have expressed their desire to maximize profits. The CFO meets with the other C suite members and the board of directors to explain what is happening. Make a meaningful comment on at least one of your classmate’s post.
Question 2.
Ethical behavior is a necessary condition for shareholder wealth maximization as opposed to profit maximization. Do you believe the goal of the firm is always consistent with ethical considerations? What would you do if you could implement an unethical (and undetectable) action that would increase firm value? Hint: Review Agency Theory (see below) and conduct external research (as applicable).
Eisenhardt, K. M. (1989). Agency theory: An assessment and review. Academy of Management Review, 14(1), 57-74.
Question 3.
Your firm, Cheesis Fin Inc., is a British manufacturer of fine Stilton cheese. You believe you can sell your product effectively in France. You have recently agreed to sell a large container of cheese for 40,000 euros in six months’ time. The spot rate of exchange between euros and pounds is 1.6 euros/pound. The forward rate for a transaction in six months is 1.55 euros/pound.
Discuss the following questions/statements:
Explain how you might establish a forward contract to mitigate your transaction exposure in this instance. What will be your expected future cash flow in pounds?
If you expect the future spot rate in six months to be 1.5 euros/pound, will this influence your decision?
Suppose you decide to undertake the forward transaction, what happens if in four months you learn that your cheese has spoiled and you cannot deliver on your promised side of the transaction?
Why international trade is more difficult and risky from the exporter’s perspective than is domestic trade.
Do you think that a country’s government should assist private business in the conduct of international trade through direct loans, loan guarantees, and/or credit insurance?
Question 4.
There are several risks associated with operating a multinational corporation. Any company doing business in a foreign country has to consider political or country risks. Especially if the target country has a relatively unstable political environment, financial managers must incorporate the potential risk into the cost of the project.
Discuss the following statements/questions:
Given the risks associated with an MNC, discuss why a firm would choose to operate as an MNC.
Describe political risk on a macro and micro level and provide examples of each.
Why is the repatriation of cash flows from an overseas project considered critical?
Question 5.
1a. The value creation goal of corporate governance focuses on shareholder value creation and enhancement through the development of long-term strategies to ensure sustainable and enduring operational performance. The value protection goal of corporate governance concentrates on the accountability of the way a company is managed and monitored to protect the interests of shareholders and other stakeholders. These two concepts should be considered within every company.
Discuss the significance and importance of investors (shareholders) as the first tier of the stakeholder hierarchy.
1b. External governance mechanisms are intended to monitor the company’s activities, affairs, and performance to ensure that the interests of insiders (management, directors, and officers) are aligned with the interests of outsiders (shareholders and other stakeholders). Examples of external mechanisms are the capital market, the market for corporate control, and the labor market, as well as state and federal statutes, court decisions, shareholder proposals, and best practices of investor activists. These mechanisms may be helpful in aligning management incentives with shareholder interests, and controlling management behavior. Interestingly, the FBI state the rise of digital technology and internet file sharing has caused of intellectual property theft to cost U.S. businesses billions of dollars per year with loss of jobs and loss of tax revenues (Intellectual property theft, 2010).
Reference:
Intellectual property theft: It’s an age old crime. (2010). Retrieved February 28, 2016, from https://www.fbi.gov/about-us/investigate/white_collar/ipr/ipr
Scenario:
Mary S, an independent petroleum geologist, has prepared a package of her maps, analysis, and other supporting material to try to sell a company with sufficient capital the notion of drilling the well. Mary has worked on this project for the past two years and expended $30,000 in acquiring information and additional software to develop the drilling prospect. She cannot afford to lease the property, so she has prepared an agreement that a company looking at her prospect agrees to not go around her and take her idea. Mary shows the idea to Big Dog Oil Company (ABC Stock Exchange). Big Dog signs off agreeing to pay her $75,000 and to assign a 3 per cent overriding royalty interest if they decide to do the deal. One of the managers, Joe D., working for Big Dog is recruited by the board of directors of Little Cat Gas Company (XYZ Stock Exchange) to become their CEO. Joe tells the board of Little Cat about his idea to drill a well. Little Cat leases the project area and drills a highly successful well. Joe gets a huge stock award. Mary does not find out about Little Cat until afterwards. Mary is upset that Joe has taken her idea; has her attorney file suit, a subpoena is issued for all the records of Little Cat, effectively shut them down. This is the only commercial success Little Cat has had and has essentially rescued them from bankruptcy. This geologically successful idea is worth several million dollars to Mary, who can barely afford to support her family.
What are the corporate governance and ethics problems? Do not discuss legal problems!
Question 6.
Do you believe integrating corporate governance and business ethics education into the business curriculum of a school is a good idea? Why or why not?
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