Question

Which one of the following is an agency cost?

A.closing a division of a firm that is operating at a loss
B.Accepting an investment opportunity to add vale to the firm
C.paying financial incentives to management to keep shareholders' interest as top priority
D.increasing the quarterly dividend

Answer 1

An agency cost example is paying financial incentives to management to align their goals with the shareholders, as it represents an added expense to motivate managers to act in the shareholders' best interest. Option c.

Step-by-step explanation:

Among the choices listed for an example of an agency cost, the correct answer is paying financial incentives to management (option c) to keep shareholders' interest as top priority. Agency costs refer to the expenses related to resolving the conflicts of interest between shareholders and management. This includes monitoring and incentivizing the management to align their actions with the objectives of the shareholders. Paying financial incentives to management can be seen as an agency cost because it involves extra expenditure to motivate managers to act in the best interest of the shareholders.