Terminology* Define the following:
- a. Agency costs in capital investment.
- b. Private benefits.
- c. Empire building.
- d. Entrenching investment.
- e. Delegated monitoring.
a)
To define: Agency cost in capital investments.
Explanation of Solution
Agency costs in capital investments are nothing but value lost when the managers of the company don’t act to maximize price. This includes monitoring and control cost.
b)
To define: Private benefits.
Explanation of Solution
Private benefits are nothing but the advantages or perks enjoyed by the managers
c)
To define: Empire building.
Explanation of Solution
Empire building is that the act of making an attempt to extend the scope and scale of an individual or organization powers and influence. Within the corporate world, this can be seen at the intra-company level once managers are involved in increasing their size but the NPV.
d)
To define: Entrenching investment.
Explanation of Solution
Managerial entrenchment happens once mangers gains a lot of power, with that they are able to use firm to more their own interests instead of the interests of the shareholders. They choose the projects to increase their value to the firm.
e)
To define: Delegated monitoring.
Explanation of Solution
Delegated monitoring is nothing but monitoring on behalf of others or principals.
Example, the board of directors of a company monitors company management and operations performance on behalf of the company stakeholders.
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Chapter 12 Solutions
PRIN.OF CORPORATE FINANCE
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