Managers owning a small proportion of a firm's equity can be expected to work less, maintain more lavish expense accounts, and accept more pet projects with negative NPVs than managers owning a large proportion of equity. In light of this statement reflecting the agency cost of equity, answer the following questions. (i) Who bears the agency cost of equity? (ii) How can agency cost of equity be reduced? (iii) What is the impact of agency cost of equity on a firm's capital structure choice?

Managers owning a small proportion of a firm's equity can be expected to work less, maintain more lavish expense accounts, and accept more pet projects with negative NPVs than managers owning a large proportion of equity. In light of this statement reflecting the agency cost of equity, answer the following questions. (i) Who bears the agency cost of equity? (ii) How can agency cost of equity be reduced? (iii) What is the impact of agency cost of equity on a firm's capital structure choice?

Managerial Accounting

15th Edition

ISBN:9781337912020

Author:Carl Warren, Ph.d. Cma William B. Tayler

Publisher:Carl Warren, Ph.d. Cma William B. Tayler

Chapter10: Evaluating Decentralized Operations

Section: Chapter Questions

Problem 7DQ: (a) Explain how return on investment might lead a divisional manager to reject new investments that...

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Financial managers shouldconsider this when.improving thefinancials of the firm A. that the overall goal is the maximization of the market value of the equity through improved income and cashflows.B. that cost minimization is the primary concern of the firm.C. that exposing the firm to the most risk for the most return should be priority.D. that the personal goals of customer and employees are above the goals of the shareholders.
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Which one of the following actions by a financial manager creates an agency problem? Lowering selling prices that will result in increased firm value Agreeing to expand the company at the expense of stockholders' value Borrowing money when doing so creates value for the firm Agreeing to pay management bonuses based on the market value of the firm's stock
40-The bonus plan hypothesis is based on the agency relationship between the manager and the shareholder. Now both want to satisfy their needs without clash. Shareholder want to maximize his wealth while manager want to show higher profit in order to be rewarded. For that agency cost will be incurred which includes O a. Monitoring cost to see the authenticity of financial statements O b. All of the options O c. Residual cost for some issues O d. Bonding cost for preparing financial reports for the owner
1. The DuPont equation Corporate decision makers and analysts often use a particular technique, called a DuPont analysis, to better understand the factors that drive a company’s financial performance, as reflected by its return on equity (ROE). By using the DuPont equation, which disaggregates the ROE into three components, analysts can see why a company’s ROE may have changed for better or worse and identify particular company strengths and weaknesses. The DuPont Equation A DuPont analysis is conducted using the DuPont equation, which helps to identify and analyze three important factors that drive a company’s ROE. According to the equation, which of the following factors directly affect a company’s ROE? Check all that apply. Efficiency in use of total assets Market-to-book-value ratio Operational efficiency Most investors and analysts in the financial community pay particular attention to a company’s ROE. The ROE can be calculated simply by…
(a) Explain how return on investment might lead a divisional manager to reject new investments that could be profitable for the company as a whole. (b) How can this disadvantage be overcome?
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