a) You have $100,000 that you would like to invest. You have three investment choices: Savings...

a) You have $100,000 that you would like to invest. You have three investment choices: Savings Account A which earns 6% APR compounded annually, Savings Account B which earns 5.8% APR compounded monthly, or Savings Account C which earns 5.9% APR compounded quarterly. Which account should you choose? a) Savings Account A b) Savings Account B c) Savings Account C

b)Which of the following is an example of the so called `agency problem' or `agency costs' in a large corporation:

a) managers foregoing salary to improve the firm's earnings

b) managers foregoing value enhancing new projects in order to reduce the risk of being fired c) managers updating stockholders of problems at the annual stockholders' meeting

d) all of the above.

Solutions

Expert Solution

B) The agency problem arises when the agent is not acting in the best interest of the principal but rather taking action which are beneficial to himself.

Here the correct answer is B)

managers foregoing value enhancing new projects in order to reduce the risk of being fired

Here the manager (agent) is not acting in the best interest of the shareholder (principal).

Option a) manager is acting in the best interest of the principal. In option C) Manager is acquainting the shareholder of the issues which is a good thing.

jeff jeffy answered 1 year ago

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