Economics: Private and Public Choice (MindTap Course List)
16th Edition
ISBN: 9781305506725
Author: James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson
Publisher: Cengage Learning
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Question
Chapter 21, Problem 4CQ
To determine
Principal agent problem.
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In which form of business ownership is the principal-agent problem likely to be the greatest problem? Explain why
What is an economically meaningful corporate event from a shareholders’ ownership perspective?
a. stock buyback
b. stock split
c. stock dividend
In chapter 7, "Financial Markets," of the book Naked Economics, the author, Charles Wheelan, states, that, "...all financial instruments - no matter how complex the bells and whistles - are based on four simple needs." Which of the below is NOT of these "simple needs"?
Raising Capital.
Assumption of risk.
Insuring Against Risk.
Chapter 21 Solutions
Economics: Private and Public Choice (MindTap Course List)
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Similar questions
- Why might a company’s stock price fall after record earnings are announced? Conversely, why might the stock price increase after losses are disclosed?arrow_forwardThe Principle of Capital Market Efficiency says that market prices of financial assets that are traded regularly in the capital markets reflect: Group of answer choices all available information and adjust partially and quickly to “new” information. all available information and adjust fully but slowly to “new” information. most available information and adjust fully and quickly to “new” information. all available information and adjust fully and quickly to “new” information.arrow_forwardThe efficient market hypothesis argues that it is easier to predict changes in the level of prices of shares since everyone has access to the same set of information. True or False?arrow_forward
- Describe the principal-agent problem between firm owners and managers. Make sure you identify the principal and the agent and discuss the information asymmetries and different goals of the two players.arrow_forwardApple Corporation requires its top managers to own shares of stock in Apple equal in value to three times their annual salary. Explain what problem Apple is trying to solve with this requirement, and explain whether this requirement does indeed solve the problem.arrow_forwardAn article in The Wall Street Journal discusses a trend among some large U.S. corporations to base the compensation of outside members of their boards of directors partly on the performance of the corporation. "This growing practice more closely aligns the director to the company. [Some] companies link certain stock or stock-option grants for directors to improved financial performance, using a measure such as annual return on equity." (a) How would such a linkage tend to reduce the agency problem between managers and shareholders as a whole? (b) Why could directors be more efficient than shareholders at improving managerial performance and changing their incentives? (c) How does the concept of moral hazard apply to this situation and what policies can be put in place to mitigate it?arrow_forward
- Suppose that you have bought a total of 3200 shares of stock of a particular company. You bought 1200 shares of stock at $18 per share, 800 shares of stock at $10 per share, and the remaining shares at $21 per share. What is the average price you paid per share of stock? (please round your answer to 2 decimal places)arrow_forwardMany workers hold large amounts of stock issued by the firms at which they work. Why do you suppose companies encourage this behavior? Why might a person not want to hold stock in the company where he works?arrow_forwardWhat happens to interest rates in the market if the stock brokerage commission declines? Explain the reason for your answer!arrow_forward
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