Your neighbor Freewheeling Franklin has a very successful new internet-based tec

Question

Your neighbor Freewheeling Franklin has a very successful new internet-based technology company. While his company has great cash flow, you see Mr. Franklin has a collection of five expensive sports cars in his newly built garage. You also see him throwing some extravagant parties every weekend where he serves expensive champagne. Based on the required background readings such as Ross, et al. (2013)., explain how you would handle the following situations:

Mr. Franklin asks you for a loan to help expand his business and offers you an interest rate considerably higher than you would get from leaving your money in the bank. As a lender, what measures might you take to make sure you get your money back and Mr. Franklin won’t waste the money?

Mr. Franklin asks you to buy one-third of his company, and wants to use the money from selling this portion of the company to expand his business. As a shareholder, what steps might you take to make sure he spends his profits and the investment money you gave him wisely?

Explanation / Answer

To get your money back when you lend to Mr. Franklin, you have to ensure that the loan you lend to Mr. Franklin is backed by a collateral security such as real estate, bank deposits etc. This would ensure that in the event of the loan going default, the loan amount can be recovered by disposing off the collateral security.

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As a 1/3 shareholder of the company, you have the right to vote in the general meeting of the shareholders. You can use your voting rights to make sure Mr. Franklin spends his profits and the investment money you gave him wisely.

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