Student
Examination paper
“Come all for this greatness”
...100% Correct Ans...
ECS1601 - Assessment 2
Inside Directors
answ>> hold managerial positions within the company
Outside Directors
answ>> Have no other affiliation or financial interest with the company
Agency relationship
answ>> Arises whenever an individual or group, called a principal, hires someone called
an agent to perform a service and the principal delegates decision-making power to the
agent.
Agency Conflict
answ>> Refers to a conflict between principals and agents. For Example, managers, as
agents, may pay themselves excessive salaries, obtain unreasonably large stock options, and
the like, at the expense of the principals, the stockholders.
,Agency Costs
answ>> are the reductions in a company's value due to actions by agents, including the
costs that principals incur (such as monitoring costs) trying to modify their agents'
behaviors.
Targeted Share repurchases
answ>> also known as greenmail, occur when a company buys back stock from a potential
acquirer at a price higher than the market price. In return, the potential acquirer agrees not
to attempt to take over the company.
Shareholder rights provisions
answ>> also known as poison pills, allow existing shareholders to purchase additional
shares of stock at a price lower than the market value if a potential acquirer purchases a
controlling stake in the company.
Agency conflicts are a special example of a conflict of interest; specifically, they are created
by the relationship between _____________ , and result from inconsistencies or disputes
between the interests and motivations of the different parties. The magnitude of these
conflicts may be made larger or smaller by the environment in which they occur and the
availability of techniques or events to prevent, reduce, or rectify them.
answ>> an agent and a principal
For example, in businesses managed by professional managers, managers frequently have
less financial and emotional commitment to the business than the firm's owners (the firm's
, common shareholders). The ___________ of ownership and management and the
__________ of decision making by the owners to the professional managers create an
environment in which these conflicts can take root.
answ>> Separation, Delegation
To prevent, reduce, or correct these conflicts between their managers and themselves,
shareholders often have to incur additional real costs called ________ costs.
answ>> Agency
In general, there are four categories of real or opportunity costs incurred by shareholders
designed to prevent, mitigate, or correct management-shareholder agency conflicts. They
are:
1. Expenditures to minimize management's desire to act contrary to the best interests of
shareholders
2. Expenditures to monitor management's activities
3. Expenditures to provide a bond against management dishonesty
4. The opportunity cost of lost profits
Consider the following situation and identify both the category of the expenditure and the
best device that might be used to prevent, reduce, or correct the agency conflict:
Examination paper
“Come all for this greatness”
...100% Correct Ans...
ECS1601 - Assessment 2
Inside Directors
answ>> hold managerial positions within the company
Outside Directors
answ>> Have no other affiliation or financial interest with the company
Agency relationship
answ>> Arises whenever an individual or group, called a principal, hires someone called
an agent to perform a service and the principal delegates decision-making power to the
agent.
Agency Conflict
answ>> Refers to a conflict between principals and agents. For Example, managers, as
agents, may pay themselves excessive salaries, obtain unreasonably large stock options, and
the like, at the expense of the principals, the stockholders.
,Agency Costs
answ>> are the reductions in a company's value due to actions by agents, including the
costs that principals incur (such as monitoring costs) trying to modify their agents'
behaviors.
Targeted Share repurchases
answ>> also known as greenmail, occur when a company buys back stock from a potential
acquirer at a price higher than the market price. In return, the potential acquirer agrees not
to attempt to take over the company.
Shareholder rights provisions
answ>> also known as poison pills, allow existing shareholders to purchase additional
shares of stock at a price lower than the market value if a potential acquirer purchases a
controlling stake in the company.
Agency conflicts are a special example of a conflict of interest; specifically, they are created
by the relationship between _____________ , and result from inconsistencies or disputes
between the interests and motivations of the different parties. The magnitude of these
conflicts may be made larger or smaller by the environment in which they occur and the
availability of techniques or events to prevent, reduce, or rectify them.
answ>> an agent and a principal
For example, in businesses managed by professional managers, managers frequently have
less financial and emotional commitment to the business than the firm's owners (the firm's
, common shareholders). The ___________ of ownership and management and the
__________ of decision making by the owners to the professional managers create an
environment in which these conflicts can take root.
answ>> Separation, Delegation
To prevent, reduce, or correct these conflicts between their managers and themselves,
shareholders often have to incur additional real costs called ________ costs.
answ>> Agency
In general, there are four categories of real or opportunity costs incurred by shareholders
designed to prevent, mitigate, or correct management-shareholder agency conflicts. They
are:
1. Expenditures to minimize management's desire to act contrary to the best interests of
shareholders
2. Expenditures to monitor management's activities
3. Expenditures to provide a bond against management dishonesty
4. The opportunity cost of lost profits
Consider the following situation and identify both the category of the expenditure and the
best device that might be used to prevent, reduce, or correct the agency conflict:
