a)
To determine: The definition of agent, principal and agency relationship.
a)
Explanation of Solution
If one or more people, the managers, employ another person, the agent, conduct some service and then assign decision-making authority to that agent, an agency relationship occurs. Relationships between primary agencies exist among
- Stockholders and managers
- Debt holders and stockholders.
b)
To determine: The definition of agency cost.
b)
Explanation of Solution
The expenses of the corporation include all costs incurred by investors to enable management to increase the stock value of a company rather than operating in their interests. The three key types of company costs are"
- Administrative activities controlling expenditure, such as audit costs.
- Expenditure on structuring an organization in such a way as to reduce undesirable managerial behavior, such as nominating outside investors to the board of directors.
- Expenditure on incentives incurred when restrictions imposed by shareholders, such as criteria for voting by shareholders on certain topics, hinder managers ' ability to take appropriate action to improve shareholder wealth.
c)
To determine: The definition of basic types of agency conflicts.
c)
Explanation of Solution
An agency issue arises when a company manager owns less than 100% of the common stock of the company, creating a potential conflict of interest called an agency conflict. The fact that the director will not receive all the wealth benefits generated by his or her efforts or bear all the expense of perquisite consumption would increase the incentive to take actions that are not in the best interests of non-manager investors.
There may also be conflicts between stockholders (through managers) and creditors in addition to conflicts between stockholders and managers. Creditors have a claim for payment of interest and principal on debt on part of the company's earnings stream, and in the event of bankruptcy, they have a claim on the company's assets. Nevertheless, stockholders monitor decisions (through managers) that affect the company's riskiness.
d)
To determine: The definition of managerial entrenchment; nonpecuniary benefits.
d)
Explanation of Solution
Managerial entrenchment occurs when a company has such a weak board of directors and in its corporate charter has such strong anti-takeover provisions that senior managers feel there is very little chance of being removed. Non-specific benefits are non-real cash rewards, such as luxury workplaces, country club memberships, corporate jets, and an excessively large staff.
e)
To determine: The greenmail; poison pills; restricted voting rights.
e)
Explanation of Solution
Targeted share repurchases, also termed as greenmail, occur when a firm buys back stock at a higher than fair market price from a potential acquirer. The potential acquirer agrees, in return, not to try to take over the business. Provisions on investor rights, also known as poison pills, enable existing shareholders in a company to purchase additional stock shares below market value if a prospective acquirer buys a majority stake in the company.
A limited clause of voting rights deprives a shareholder of voting rights automatically if the shareholder owns more than a defined amount of stock.
f)
To determine: The definition of stock options; ESOP.
f)
Explanation of Solution
A stock option permits its owner to buy a stock share at a fixed price, termed the strike price, regardless of what the stock's actual price is. Stock options always have an expiry date after which they cannot be exercised.
A limited stock grant allows an employee to buy stock shares at a large discount from the current stock price, but for a specified number of years, the employee is restricted from selling the stock. An Employee Stock Ownership Plan often referred to as an ESOP, is a type of retirement plan where employees own the company's stock.
Want to see more full solutions like this?
- discuss the three ways of resolving the agent problem in public companyarrow_forwardManagers in decentralized organizations make decisions relating to all of the following except_______. A. the companys stock price B. equipment purchases C. personnel D. prices to charge customersarrow_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_forward
- Match the statement concept of category A to category B. And explain their significant relationships Category A I.Agency theory II.Contingency theory III.Bargaining theory IV. Investment theory V. Residual claimant Category B 1. Organized sector 2. No single best way 3. Presence of contracting scheme 4. High attributes 5. Factors of productionarrow_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_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
- What is the common agency problem faced by shareholders? Describe TWO (2)situations in which stockholders can ensure that management’s and stockholders’interests are aligned?arrow_forwardStakeholders include any one who has financial interest stake or claim in an organization and or what it does. Select one: True Falsearrow_forwardExplain the principles of agency theory and discuss the ethics of directors being able to decide their remuneration, albeit through a remuneration committee.arrow_forward
- Any situation where a potential conflict can arise between the firm's owners and its managers is referred to as a(n): Group of answer choices organisational problem. compensation issue. agency problem. personnel conflict. control issue.arrow_forwardWhich of the following is sometimes called the talent bench? a. Conflict management O b. Succession planning O C. Performance appraisal O d. Training and developmentarrow_forwardWhich statement best describes the essence of the Agency Problem? Shareholders allocate decision-making authority to the managers, who might act dishonestly or guard their own self-interest. Managers and shareholders always have aligned interests and goals. Managers always act in the best interest of shareholders. Shareholders retain all decision-making authority.arrow_forward
- Principles of Accounting Volume 2AccountingISBN:9781947172609Author:OpenStaxPublisher:OpenStax CollegeAuditing: A Risk Based-Approach to Conducting a Q...AccountingISBN:9781305080577Author:Karla M Johnstone, Audrey A. Gramling, Larry E. RittenbergPublisher:South-Western College PubEBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT
- Business/Professional Ethics Directors/Executives...AccountingISBN:9781337485913Author:BROOKSPublisher:CengageIntermediate Financial Management (MindTap Course...FinanceISBN:9781337395083Author:Eugene F. Brigham, Phillip R. DavesPublisher:Cengage Learning