Which of the Following Is True of the Principal-Agent Problem

question 88

Multiple Choice

Which of the following is true of the principal-agent problem?

• A) It arises when the interests of the agent and the principal differ.
• B) It arises when it is relatively easy for the principal to monitor the agent's performance.
• C) When there is a principal-agent problem, agency costs are zero.
• D) When there is a principal-agent problem, the agent is usually worse off.

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Definitions:

Spontaneous Financing

Financing that naturally increases as a firm's operating levels increase, typically through trade credits and accruals.

Five Year Bonds

Debt securities issued with a maturity of five years, typically paying interest semi-annually.

Factor Receivables

The financial practice of selling accounts receivable to a third party at a discount to immediately generate cash.

Uncollectible Accounts

Accounts receivable that are recognized as not being collectible, representing losses to the company.