The Principal-Agent Problem Arises When

question 21

Multiple Choice

The principal-agent problem arises when

• A) the principal and the agent have different objectives.
• B) the principal cannot enforce the contract with the agent or finds it too costly to monitor the agent.
• C) the principal cannot decide whether the firm should seek to maximize the expected future profits of the firm or maximize the price for which the firm can be sold.
• D) both a and b
• E) both a and c

---

Definitions:

Net Present Value

Net Present Value (NPV) is a financial metric used to evaluate the profitability of an investment, calculated by summing the present values of incoming and outgoing cash flows over a period of time.

Net Present Value

A method used in capital budgeting to assess the profitability of an investment or project, calculated by discounting all expected future cash flows to the present value.

Market Value

The present cost set for assets or services to be traded in the marketplace.

Investment Criteria

The guidelines or metrics used by investors or managers to assess the attractiveness of an investment or project.