Course: PAM 5334
Professor: Rick Gedds
Student: Maoling Yuan
1. Suppose you want to start a steel mill. Provide a rough estimate of how much capital (money) you would need to start your steel mill. Assuming that you have access to debt (define) and equity (define) markets, how would you use those two financial instruments to raise the financial instruments, which one are you likely to use more of and why? When I plan to start a steel mill, the minimum capital which I need is 10,000 USD. When I consider the budget of the new steel mill, there are several types of cost. At first, I need the capital to purchase industry equipment, like machines and office staff. Then, I need to pay off the money for human resources to hire employees. Moreover, there is also additional budget for marketing. When I try to raise the capital from debt and equity market, I would prefer debt market. If I choose to raise the money from equity markets, I would sell the stock of the company to shareholders. So the shareholders have the ownership interest in the firm. As a new company, I would control the company and don’t influenced by the shareholders. On the other hand, I can apply a bank loan, credit line and issue bonds when I want to raise the money from a debt market. In debt market, I wouldn’t need to share the ownership to others. The bondholders and banks don’t have the vote right of the company. I just need to pay the interest to the bondholders or banks. As a result, I can have the control of my company.
2. Define the term “corporate governance” using the concepts of agency costs and the agency problem, and briefly summarize just one corporate governance-related issue in the current media. The separation of the CEO position with the chairman of the board is one example, but you are free to choose any other