EBK CONTEMPORARY FINANCIAL MANAGEMENT
14th Edition
ISBN: 9781337514835
Author: MOYER
Publisher: CENGAGE LEARNING - CONSIGNMENT
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Chapter 1, Problem 8QTD
Summary Introduction
To discuss: The instances of agency costs incurred by stockholders in agency relationship among the stockholders and company’s management.
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Explain what is meant by agency relationships and agency costs. Why management may tend to pursue goals other than shareholder wealth maximization. Give some examples of agency costs incurred by shareholders in the agency relationship between the shareholders (owners) and management of a firm.
Define agency relationship. Briefly describe agency problems, agency costs and incentives do managers in large corporations have to maximise share value.
Discuss the agency costs in the Agency Theory in corporate governance and solutions applied thereto.
Chapter 1 Solutions
EBK CONTEMPORARY FINANCIAL MANAGEMENT
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- Explain the term “agency relationships” and discuss the conflicts that might exist in the relationship between’i) Shareholder and managersii) Shareholders and creditorsWhat steps may be taken to overcome these conflicts?arrow_forwardDefine agency problems, and describe how they give rise to agency costs. Explain how a firm’s corporate governance structure can help avoid agency problems.arrow_forwardAgency costs are best defined as: O The cost of conflict between the banks and shareholders * O The cost of conflict between the creditors and shareholders O The cost of conflict between the board of directors and creditors The cost of conflict between the board of directors and shareholdersarrow_forward
- 1. Which of the following best describes agency cost?A) Costs involved with any effort to minimize the conflict between the principal's interest and the 2/3.B) Cost incurred by an agent to facilitate the creation of an agency relationship with theirprincipal.C) Cost incurred by a principal to establish an agency.D) Agency costs are irrelevant costs that are not measurable nor recognized in the face of the Financial Statement and is therefore not a cost to a company. in the long-term. 2. Which of the following is a valid reason why Financial Managers should put emphasis on long-term growth rather than short-term profit maximization?A) A manager should focus on profit maximization because it adds to the wealth of shareholdersB) A manager should focus on long-term growth because short-term profit maximization does not add to the wealth of shareholders on the long-term.C) There is no difference between focusing on short-term profit maximization and emphasis on agents interestD) Emphasis…arrow_forwardWhat is an agent, and what is a principal? Whatkinds of situations in companies give rise to conflicts between these two, called agency conflicts?arrow_forwardAgency theory is related to behavior of principle and agent. Explain agency theory by giving an example of corporate sectorarrow_forward
- What is Earning management/creative accounting? How might the monitoring and bonding features of the agency model explain EM/CA?arrow_forwardEvaluate the use of profit related bonus scheme and share options to address the issues of the agency relationship in an organisationarrow_forwardWhat is the possible agency conflict between inside owner/managers andoutside shareholders?arrow_forward
- Which one is false? A. The agency is defined as a relationship by consent between two parties, whereby one party agrees to act on behalf of the other B. Agency theory assumes that a conflict of interest exists between the owners of a firm and the managers C. Generally agency costs of a firm are not controlled by firm itself D. Financial reporting may provide the information for the potential agency costs of the firmarrow_forwardWhich of the following does not describe a management control system? A. establishes a companys strategic goals B. implements a companys strategic goals C. monitors a companys strategic goals D. a system that only measures profitabilityarrow_forwardWhich of the following is/are correct regarding agency costs? 1. Indirect costs occur when managers, acting to minimize the risk of the firm, forego investments shareholders would prefer they take. II. Direct costs occur when shareholders must incur costs to monitor the manager's actions. III. Direct costs occur when managers buy assets considered necessary by the firm's owners. Select one: O a. I, II, and III O b.ll only O c.Il and IIl only O d.lonly O e.l and II onlyarrow_forward
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