Question 1
An agency relationship arises when one or more people (principal) hire an organization, or another person called an agent to undertake some services (Purwanto, 1). The agent is also given decision making authority.
There will be no agency problem. The problem is likely to arise only when the firm's manager borrows or does not own 100% of its common stock. Since all the money invested in the business is yours and you are the only employee, you wholly own the firm, thus having no trouble with anyone.
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Question 2
Agency conflict between a lender and a borrower occurs when the later make decisions after receiving the loan, thus affecting the lender's welfare. For instance, the debtor can take more dept or invest in risky projects. If the creditors anticipate such behaviors, they may charge interests higher than the normal rate to offset the possible risk. The agency cost is the high-interest rates being charged. The lenders can mitigate the costs by having restrictive debt agreements and loans secured.
Question 3
Corporate governance is the set of procedures, laws, and rules that impact an organization's operations and its manager’s decisions. The five provisions include; capital structure choice, bylaws and charter provision that involve the possibility of hostile takeovers, accounting control system, compensation plan, and discipline and monitoring by directors.
Question 4
The stock option gives the owner the right to purchase the firm’s stock at a stipulated price (strike price) even when the actual price is higher (Ermel, & Medeiros, 2). This right can only be exercised after a given number of years, referred to as maturity or expiration date.
The stock option's potential problem is the fact that the manager can underachieve but still reap benefits from options whenever the stock price rises above exercise cost. Sometimes options make managers take excessive risks or fabricate financial statements.
Question 5
Firms in nations with reliable investor protection tend to have lower equity costs, easy access to financial markets, less noise in stock prices, and increased market liquidity.
Sources
Purwanto, A. (2020). Principal-agent relationship, uncertain results and the moral economy. https://doi.org/10.18488/journal.1.2020.104.207.222
Ermel, M. D., & Medeiros, V. (2020). Stock-based compensation plan: An analysis of the determinants of its use. https://doi.org/10.1590/1808-057x201907620
