FinalExam

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G4076 Final Exam

Distributed: November 21, 2014;
Due: December 5, 2014.

Instructor: Alexei Chekhlov

Each question is not difficult, of intermediate or below difficulty level, but there are a total of 44 questions. When you are asked to write something “in detail”, it is understood that you need to write more than one sentence answer, but try not to write more than ten sentences. Please, allocate enough time to complete the exam on time. When submitting your Final Exam, please, make sure it has your name and e-mail prefix on it.

This exam is take-home, open-book, which means that you are allowed to use the BKM textbook and all the materials that are
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It is exchanging one financial asset for another financial asset. Then, Lanni uses $50,000 in cash (financial asset) to pay off its bank loan financial liability. This bank loan promissory note is a financial asset that is destroyed in this transaction since it no longer exists after it is paid off.

1.56. Discuss the agency problem in detail.

An agent is hired by the principal to perform some duty that benefits the needs of the principal. The agency problem is an issue that occurs when the agents use their authority to make decisions in their own interest at the expense of the principals. For example, company managers (agents) were put in place to make decisions that maximize the wealth of the shareholders (principals) but may instead engage in empire-building or may make inefficient company decisions for job security. In order to mitigate these potential agency problems, several mechanisms have evolved. These include directly tying the compensation of managers to the success of the firm; oversight and influence by the board of directors as well as outsiders such as security analysts, creditors, or large institutional investors; the threat of a proxy contest by unhappy shareholders to replace the current management team; or the threat of takeover by another firm. However, most of these mechanisms have a low chance of success or can create other problems. The best mechanism that prevents agency problems is the threat of takeover by another firm. If the

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