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Business Finance Question Paper
Business Finance
Course:Advanced Diploma In Business Administration (Business Administration)
Institution: question papers
Exam Year:2010
BUSINESS FINANCE
End of semester exam 2011
CASE ONE
Suppose you decided (like Michael Dell), to start a computer company. You know from experience that many students, who are now required to own and operate a personal computer, are having difficulty setting up their computers, accessing various materials from the local college network, and from the Internet, and installing new progress when they become available. Your immediate plan is to provide a service under which representatives of your company will help students set up their computers, show them how to access various data bases, offer an e-mail “help desk” for various problems that will undoubtedly arise. You will also provide a gateway web page to the campus computer, hence to the Internet and as Intranet.
If things go well-and you think they will – you plan to purchase computers and offer them, with all required soft-ware fully installed, to students. Moreover, you plan to develop your web sitewith links to various destinations student will like, and as traffic to your site builds, to offer advertising services (and to charge for links) to local business. For example, someone could go through your web site to order pizza while studying for a finance exam.
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, probably sooner rather than later, you plan to go public with an IPO, then to buy a yacht and take off for the South Pacific.
a) When you first begin operations, assuming you are the only employee and only your money is invested in the business, would you any agency problems exist? Explain( 5 marks)
b) If you expanded, and hired additional people to help you, might that give rise to agency problems?(5 marks)
c) If you needed capital to buy an inventory of computers to sell to students, or to develop software to help run the business, might that lead to agency problems? Would it matter if the new capital came in the form of an unsecured bank loan, a bank loan secured by your inventory of computers, or from new stockholders (assuming you incorporate)?(10 marks)
d) Would potential agency problems increase or decrease if you expanded operations to other campuses? Would agency problems be affected by whether you expanded by licensing franchisees or by direct expansion, where your company actually owned the businesses on other campuses and operated them as divisions of your original company?(10 marks)
e) If you were a bank lending officer looking at the situation, can you think of any action or actions that might make a loan to the company feasible?(10 marks)
f) As the founder-owner-president of the company, what action or actions can you think of that might mitigate agency problems if you expanded beyond your home campus? Would going public in an IPO increase or decrease agency problems?(10 marks)
g) If you had an IPO and became a public company, would agency problems be more likely if you (1) bought the yacht and took off or (2) stayed on as CEO and ran the company?(10 marks)
h) Why might you want to (1) inflate your reported earnings or (2) use off balance sheet financing to make your financial position look stronger? What are the potential consequences of doing this?(5 marks)
i) If the company were successful, what kind of compensation program might you use to minimize agency problems?(5 marks)
j) If you were hiring someone whom you hoped you could train to manage one of the new divisions you planned to open at other campuses, would it matter to you whether or not that person understood something about financial management? Put another way, if two people were applying for a job that would lead to a managerial position, would you be interested primarily in technical skills or in a combination of technical skills and a vision of how different functions within the company fitted together? (Explain10)
k) Is it easy for a person with great technical skills (in computer programming, marketing, accounting, engineering, or what have you) to move higher and higher in management without an understanding of financial management? The answer is no, but explain why this is so.(10 marks)
l) Why might someone interviewing for an entry level job have a better shot at getting a good job if he or she had a good grasp of financial management?(10 marks)
(Total marks 100 marks)
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