Question

Which of the following statements is incorrect? Group of answer choices

a) All the answers are correct except one.
b) Financial managers should invest in a capital project only if the value of its future cash flows exceeds the cost of the project or simply the benefits of the project are larger than its cost.
c) Legally, stockholders, who are the agents, have a fiduciary duty to the managers, the principals, which means stockholders are obligated to put the interests of the managers above their own.
d) Public markets, such as the New York Stock Exchange (NYSE) and NASDAQ, are regulated by the Securities and Exchange Commission (SEC).
e) Unlike interest payments, however, dividend payments to stockholders are not tax deductible.

Answer 1

The incorrect statement is c) that stockholders have a duty to managers, which is actually the other way around; managers have a fiduciary duty to stockholders.

Step-by-step explanation:

The incorrect statement among the options provided is: Legally, stockholders, who are the agents, have a fiduciary duty to the managers, the principals, which means stockholders are obligated to put the interests of the managers above their own. This statement reverses the roles of agents and principals. In reality, managers (agents) have a fiduciary duty to the stockholders (principals), ensuring that they must act in the best interests of the stockholders. The remaining statements correctly reflect how financial managers should assess capital projects, the role of public markets, and the tax treatment of dividends compared to interest payments.

When deciding how to finance a company, issuing stock can be beneficial because there’s no obligation for dividend payments, which is distinct from the obligatory nature of interest payments on debt. Venture capitalists can closely monitor management, unlike typical public shareholders, due to their substantial ownership and better information access.