Question

Which one of the following statements is TRUE?

a. An example of an agency cost is when an outside investor is only willing to pay less for stock because she thinks the original owner will consume too many perquisites.
b. The commission required by the Federal Housing Agency for a small business loan is an example of an agency cost.
c. An example of an agency cost is when an attorney hires an expert witness for a trial.
d. An example of an agency cost is when the board of directors pays a dividend to shareholders.
e. An example of an agency cost is the salary of the agent hired to work for the principal.

Answer 1

Answer: A. An example of an agency cost is when an outside investor is only willing to pay less for stock because she thinks the original owner will consume too many perquisites.

Step-by-step explanation:

An agency cost typically occurs between between a principal and the agent. This occurs when the agent is given much power and make decisions on behalf of the principal.

An example of an agency cost is when an outside investor is only willing to pay less for stock because she thinks the original owner will consume too many perquisites. The agent typically has more information and there might be different incentives sometimes.

Therefore, the correct option is A.