Which of the following actions do not lead to agency costs and explain why? I. Foregoing...

Which of the following actions do not lead to agency costs and explain why?

I. Foregoing an investment opportunity which would add to the market value of the owners’ equity.

II. Paying a dividend to each of the existing shareholders.

III. Purchasing new equipment which increases the value of each share of stock.

IV. Hiring outside auditors to verify the accuracy of the company financial statements

Which form of business organization(s) can potentially face agency problems and which faces the greatest agency problems? Please consider each of the following business organizations and explain why they may or may not face agency problem.

I. Sole proprietorship

II. Partnership

III. Corporation

Solutions

Expert Solution

Answer is III. Purchasing new equipment which increases the value of each share of stock.

This action does not lead to agency costs because it is fulfilling the purpose of Principal-agent relationship. Principals are the stockholders of the company and management is the agent of the principal. stockholders want management to take decisions which increases shareholder value or which increases the value of each share of stock. this decision to purchase new equipment is fulfilling that purpose. rest all actions lead to agency costs.

Answer is III. Corporation.

Sole proprietorship - a business organization usually run by a single person who is both principal and agent. so this organization may not face agency problem.

Partnership - a business organization usually run by 2 or more persons. all the partners are owner or principal of the business. If all the partners are actively managing the business on their own without any employee or third person then partnership may not face agency problem but if third person or employee is representing the firm then partners are principal and employee is agent. so partnership may face some agency problem but it would be less to the degree than it does in a corporation.

jeff jeffy answered 1 week ago

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