Financial Management: Theory & Practice
16th Edition
ISBN: 9781337909730
Author: Brigham
Publisher: Cengage
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Chapter 13, Problem 3MC
Summary Introduction
Case summary:
The product is a software platform that incorporates a wide variety of media devices, including laptops, desktops, digital video recorders, and cell phones. Suppose you decide to start a company (like person S and person M). With these issues in mind, it needed to answer the following questions for potential investors. Once it has set up your business and set up procedures to run it, the plan to expand and ultimately go nationally to other colleges in the region. The main audience is the university's student body.
To determine: The type of agency conflict might occur.
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Students have asked these similar questions
Suppose you need additional capital to expand,and you sell some stock to outside investors. If youmaintain enough stock to control the company,what type of agency conflict might occur?
Which of the following is an example of the agency problem?
a.
Managers always invest in projects that have appropriate returns and that will increase shareholder wealth.
b.
Managers resign when they believe they have not always acted in the best interests of shareholders.
c.
Managers conduct an acquisition program purely to increase the size of an organisation.
d.
Managers look for new projects as they want to avoid business risk.
Clear my choice
Which one of the following actions by a financial manager creates an agency problem?
Lowering selling prices that will result in increased firm value
Agreeing to expand the company at the expense of stockholders' value
Borrowing money when doing so creates value for the firm
Agreeing to pay management bonuses based on the market value of the firm's stock
Chapter 13 Solutions
Financial Management: Theory & Practice
Knowledge Booster
Similar questions
- Which of the following statements is CORRECT? Select one: a. Conflict of interest between shareholders and managers is not possible. b. By definition, the agency problem can only take place in corporations but not in proprietorships and partnerships. c. Conflict of interest between shareholders and bondholders is not possible. d. Managers always work to maximize the long-run value, and therefore the price, of their company stocks. This is exactly what shareholders desire.arrow_forwardHow could the incentives of business profits create unwarranted influence in times of war?arrow_forwardWhich of the following is NOT normally regarded as being a good reason to establish an ESOP? a. To help retain valued employees. b. To increase worker productivity. c. To make it easier to grant stock options to employees. d. To enable the firm to borrow at a below-market interest rate. e. To help prevent a hostile takeover.arrow_forward
- How are conflicts between the shareholders and the management created? Which of the following is most accurate? a. They have either different political or religious beliefs. b. They have different views on how to manage people. The shareholders want a more liberal approach while the management wants micromanaging. c. The management would want to undertake higher risk projects in anticipation of higher returns because management compensation and bonuses are partly tied to financial performance, while shareholders may want to limit risks and invest instead in projects with lower risk. d. None of the choices are correct.arrow_forwardWhich of the following methods would be most likely to decrease the agency problems by helping motivate managers to act in the best interests of shareholders? 1. Increase the proportion of executive compensation that comes from stock options and reduce the proportion that is paid as cash salaries. 2. Eliminate a requirement that members of the board of directors have a substantial investment in the firm's stock. 3. Decrease the use of restrictive covenants in bond agreements. 4. Take actions that reduce the possibility of a hostile takeover. 5. Elect a board of directors that allows managers greater freedom of action.arrow_forwardAre poison-pill defenses ethical? If a potential acquirer buys company stock legally, thereby becoming a part owner of the company, should management be allowed to entrench itself against the wishes of this owner? Explain your answer.arrow_forward
- What is the possible agency conflict between inside owner/managers and outside shareholders? What are some possible agency conflicts between borrowers and lenders? How is it possible for an employee stock option to be valuable even if the firm’s stock price fails to meet shareholders’ expectations?arrow_forwardwhat if your company is being targeted by a SPAC would that be a good thing or a bad thing? What factors would you look at to make that determination? what are the pitfalls in selling a company?arrow_forwardWhat are some of the risks an investor would face when investing in a stock? In addition to the business risk coming from the type of business environment that your company operates in, what additional risk would be of concern to an investor? The company might be mismanaged and do poorly or go out of business. The company's stock market return might be wildly unpredictable as the operating performance might be unstable. The company's competitors might do a better job and take market share away? The list goes on and on... What risks would you face if you bought 100 shares of Tesla?arrow_forward
- In a practical sense, what signs would a CFO look for to determine if his/her firm was using too much financial leverage? What could the CFO do if these signs were encountered?arrow_forwardWhich of the following statements is CORRECT? One of the ways in which firms can mitigate or reduce potential conflicts between bondholders and stockholders is by increasing the amount of debt in the capital structure. The threat of takeover generally increases potential conflicts between stockholders and managers. Managerial compensation plans cannot be used to reduce potential conflicts between stockholders and managers. The threat of takeovers tends to reduce potential conflicts between stockholders and managers. The creation of the Securities and Exchange Commission (SEC) eliminated conflicts between managers and stockholders.arrow_forwardIt is an axiom that may be characterized by managers making decisions that conflict with the best interest of the shareholders. a. the risk-return trade-off b. the agency problems c. the curse of competitive markets d. stockholders versus managersarrow_forward
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