Question

Which one of the following actions by a financial manager is most apt to create an agency problem? Refusing to lower selling prices if doing so will reduce the net profits. Refusing to expand the company if doing so will lower the value of the equity. Refusing to borrow money when doing so will create losses for the firm. Increasing current profits when doing so lowers the value of the firm's equity. Agreeing to pay bonuses based on the market value of the company stock rather than on the firm's level of sales.

Answer 1

Answer:

Increasing current profits when doing so lowers the value of the firm's equity.

Explanation:

Agency problem is the likelihood that managers may place personal goals ahead of corporate goals. A characteristic feature of corporate enterprises is the separation between ownership and management. Thus, with the objective of survival, management would aim at satisfying instead of maximizing shareholder´s wealth.

Three generic agency problems arise in business firms:

-The conflict between the firm´s owners and its hired managers.

-The conflict between controlling and minority shareholders.

-The conflict between shareholders and non shareholders constituencies.