Master Agency Problems

Agency problems refer to conflicts of interest that arise between the owners (principals) and managers (agents) of a company. The agents may act in their own self-interest, which can be detrimental to the principals. Examples of agency problems include shirking, excessive risk-taking, and moral hazard.

The three parties to the agency problem are the principal (owner), the agent (manager), and the stakeholders (creditors, suppliers, customers, etc.).

The principal hires the agent to act on their behalf, but the agent may pursue their own interests at the expense of the principal. The stakeholders may also be affected by the actions of the agent, which can create additional conflicts of interest.

<p>Bondholders of the firm benefit (A)</p> Signup and view all the answers

<p>Bondholders of the firm (B)</p> Signup and view all the answers

<p>Fair price benefits the bondholders of the firm (D)</p> Signup and view all the answers

<p>The cost of equity increases and the cost of debt decreases.</p> Signup and view all the answers

<p>Lowering a firm's debt-equity ratio reduces the amount of financial leverage, which increases the risk for equity investors and increases the required rate of return on equity investments.</p> Signup and view all the answers

<p>Lowering a firm's debt-equity ratio reduces the risk of default, making the firm less risky for debt investors and allowing the firm to borrow at a lower rate.</p> Signup and view all the answers