Question

which one of the following actions by a financial manager creates an agency problem? refusing to borrow money when doing so will create losses for the firm refusing to lower selling prices if doing so will reduce the net profits agreeing to expand the company at the expense of stockholders' value agreeing to pay bonuses based on the market value of the company stock increasing current costs in order to increase the market value of the stockholders' equity

Answer 1

An agency problem arises when a financial manager decides to expand the company at the cost of stockholders' value, indicating a conflict of interest that could be detrimental to the stockholders.

Step-by-step explanation:

The action by a financial manager that creates an agency problem is agreeing to expand the company at the expense of stockholders' value. This action signifies a conflict of interest where the manager's decision could benefit management or the business's growth but might harm the stockholders' interests, especially if the expansion does not result in an increase in the value of their shares.

When a firm needs to access financial capital, it has the option to borrow from a bank, issue bonds, or issue stock. Borrowing money allows the firm to maintain control and avoid shareholder influence, although it commits the firm to scheduled interest payments. Issuing stock, on the other hand, involves ceding some company ownership to the public, which could potentially dilute control but does not require scheduled payments as bonds do.

Venture capitalists represent a different approach as they can provide capital while also closely monitoring management, thereby potentially mitigating the information asymmetry that can contribute to agency problems.