Homework Chapters 1 and 13
1. Henry Huggins has invested $800,000 in Southwest Development Company. The firm
has recently declared bankruptcy and has $600,000 in unpaid debts. Explain the nature of
payment, if any, by Mr. Huggins in each of the following situations.
a. Southwest Development Company is a sole proprietorship owned by Mr. Huggins.
b. Southwest Development Company is a 90-10 general partnership of Mr. Huggins and
Christina White.
c. Southwest Development Company is a limited partnership, with Mr. Huggins serving
as the general partner.
d. Southwest Development Company is a limited partnership, with Ms. White serving as
the general partner.
e. Southwest Development Company is a corporation.
2. Suppose you decide to start a company. Your product is a software platform that integrates
a wide range of media devices, including laptop computers, desktop computers, digital
video recorders, and cell phones. Your initial market is the student body at your university.
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,
hopefully sooner rather than later, you plan to go public with an IPO, then to buy a yacht
and take off for the South Pacific to indulge in your passion for underwater photography.
With these issues in mind, you need to answer for yourself, and potential investors, the
following questions.
a. What is an agency relationship? When you first begin operations, assuming you are the
only employee and only your money is invested in the business, would any agency conflicts
exist? Explain your answer.
b. If you expanded, and hired additional people to help you, might that give rise to agency
problems?
c. Suppose you need additional capital to expand and you sell some stock to outside investors.
If you maintain enough stock to control the company, what type of agency conflict might
occur?
3. Was Wells Fargos goal of maximizing shareholder wealth consistent with ethical behavior? Article
4. What were the causes of the crisis of credit?