Assume that you recently finished your second-year studies in the corporate mana
ID: 2820833 • Letter: A
Question
Assume that you recently finished your second-year studies in the corporate management field and have just reported to work as an investment strategist at the brokerage firm of Darwin Entertainment Services (DES). One of the firm’s clients is Karen Diet, a professional designer who has just come to the Australia from Europe. Karen Diet celebrated her 26th birthday with a lotto ticket that turned out to be a gift worth millions of dollars. She would like to start a company to produce and market apparel she designs for the entertainment industry and later invest in real estate. Diet has overheard that in real estate investments, mortgage securitisation could have a negative impact to the financial market. Your boss has developed the following set of questions you must answer (task for this assessment item) to explain the financial system to Karen Diet before she signs a contract with DES. The structure of the report should be appropriate to your audience, include an executive summary and address each of the following questions:
Question
It is Karen Diet's dream to run a corporation in the future. Discuss how corporations go public and continue to grow. Use relevant examples from the Australian financial system. Discuss some of the agency problems Diet might encounter and explain how such agency problems can be resolved.
Explanation / Answer
Discuss how corporations go public and continue to grow.
Many businesses, from startups to established companies, consider going public as an effective way to raise additional capital that can be used for expansion. If you can demonstrate that your company has a strong potential to be more profitable in the future, then an IPO can be a beneficial option.But being a successful public company is a long and expensive path to endure.
To achieve the benefits of being a publicly traded company, experts suggest that a private company must start preparing at least a year before an IPO. But still, it is not a guarantee to a smooth IPO. Searching for the right investment banker needs a better understanding of what it can do for you; interview at least candidates for your underwriters and ask about their strength and weaknesses.
Besides the investment banker, other key players that will assist in the IPO process include the legal counsel, the auditors, the transfer agent, the printer, and the bank note company that will engrave the currency, which can be used later for merges and acquisitions. In most cases, some experts advise a private company to employ a national accounting firm.
Meeting with underwriters for the first needs a formal presentation about your company. But a second and third meeting should be expected. During the meeting, the investment banker should feel that your company is dedicated to become a public company. Prove that your company can compete with larger companies and delivers a huge potential growth.
Choosing the right investment banker for your company is a serious concern. Some companies need to hire two investment banks. Entering into a trade with them sometimes needs suggestions from a company like Princeton Corporate Solutions, a firm that provides support to companies that have a huge potential to have a successful IPO.
Relevant examples from the Australian financial system:
Discuss some of the agency problems Diet might encounter and explain how such agency problems can be resolved:
In corporate finance, the agency problem usually refers to a conflict of interest between a company's management and the company's stockholders. The manager, acting as the agent for the shareholders, or principals, is supposed to make decisions that will maximize shareholder wealth, The agency problem arises due to an issue with incentives and the presence of discretion in task completion,
If the manager receives a fixed salary regardless of the sales figures then there would be no motive or incentive for the employees to make sure the sales numbers increase, and because of which they will not be alligned with the goal of organisation.
Solution: In this case the agency problem may also be minimized by incentivizing an agent to act in better accordance with the principal's best interests. For example, a manager can be motivated to act in the shareholders' best interests through incentives such as performance-based compensation or both fixed and performance linked pay based on some KPI (Key performance indicator) like periodic sales of store etc.
If the company is Public (Listed), then the ESOPs or employee stock options can also be provided to minimize this problem.