Mini Case Accounting, Finance, SPSS Essay Research

Mini Case for Planning a Company Expansion
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Question 1
An agency relationship refers to a fiduciary relationship where one party known as the principle allows the other party known as the agent to act on their behalf (Panda & Leepsa, 2017). It arises when the principal hires the agent to perform some services and delegate decision-making authority to the agent. The agent is subject to the control of the principal and must consent to the decisions of the principle. If I am the only employee and investor in the business, no agency conflict would exist because I am the sole owner of the company, and I own 100% of the company’s common stock.
An agency problem occurs when the company’s manager owns less than 100% of the common stock, leading to the agency conflict (Panda & Leepsa, 2017). Presumably, as a single proprietor, I would operate the business to maximize my welfare, with the measure of the welfare taking the form of increased personal wealth, profits, and more leisure. Since the manager has less than 100% of the company’s common stock, they will neither enjoy all the benefits of their efforts nor bear all the perquisite consumption costs. This will increase the incentive to take actions that are not in the best interest of shareholders who are not managers.
Question 2
Suppose the company raises funds from the outside lenders, the type of agency cost that might occur is monitoring costs caused by dept impact in the company’s investment decisions. As the name suggests, monitoring cost is the cost of monitoring the performance of the agent. The principal bears this cost to monitor the agent (Butt, 2018). For instance, shareholders or lenders would decrease the remuneration to the agent by an increasing amount as monitoring cost increases. In the case of a lending contract, the lender is likely to impose higher costs on the agent by demanding reduced, increased rates or other lending terms that favor the lender, leading to the competing interests between the parties (Butt, 2018).
In this case, there is an individual conflict between the outside lender and the creditor because the borrower makes decisions that affect the lender’s interest after borrowing the funds. By raising funds from outside lenders, the principle restricts the agent's activities to maximize the shareholder value. Therefore, the cost of controlling lending behavior is considered an agency monitoring cost to some extent (Butt, 2018). Either way, the principle bears these costs then passes them to the agent. To mitigate agency costs, lenders can have the loan secured and place restrictive covenants in the lending contract.
Question 3
Corporate governance is a set of rules, practices, and procedures by which a company is controlled and directed (Tricker & Tricker, 2015). These rules, practices, and procedures influence the operations and decisions made by the firm’s managers. Boards of directors play a central role in governing their companies. The function of shareholders in governance is to appoint...