Week 6 Problem Set
Answer the following questions and solve the following problems in the space provided. When you are done, save the file in the format flastname_Week_6_Problem_Set.docx (where flastname is your first initial and your last name), and submit it to the appropriate Dropbox.

Chapter 29 (pages 983-984):
1. What inherent characteristic of corporations creates the need for a system of checks on manager behavior? The fact that investors are not the ones actually working within the company, causing conflicts of interest with what should be done with the money being invested, but this can also create a strongly-needed system of checks and balances, to make sure both parties are doing as they should.

2. What are some examples of agency problems?
An agency problem occurs when the interests of stockholders, the board of directors, and/or the management of the company are not perfectly aligned or when these entities conflict. In publicly held companies, there are a variety of individuals with an interest in the performance of the company. The managers and executives who run the company on a day-to-day basis, the shareholders who own stock, and the board of directors who oversee the company all may have different aims or ideas of how the business can be run. For example, tying managerial compensation to performance aligns managers’ incentives with investors’ interests, but then managers are exposed to the firm’s risk, is an example of an agency problem. Or a corp. exec that wants a private plane, despite the company performing poorly.

3. What are the advantages and disadvantages of the corporate organizational structure?
Advantages are: 1. It can raise additional funds through the sale of stock; 2. Shareholders can easily transfer the ownership by selling their stock; and 3. Individual owner’ liability is limited to the value of stock they