Which One of the Following Actions by a Financial Manager

question 45

Multiple Choice

Which one of the following actions by a financial manager is most apt to create an agency problem?

• A) Refusing to borrow money when doing so will create losses for the firm
• B) Refusing to lower selling prices if doing so will reduce the net profits
• C) Refusing to expand the company if doing so will lower the value of the equity
• D) Agreeing to pay bonuses based on the market value of the company's stock rather than on its level of sales
• E) Increasing current profits when doing so lowers the value of the company's equity

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Definitions:

Common Stock

A type of securities that represents ownership in a corporation, granting holders voting rights and a share in the company’s profits via dividends.

Equity Method

An accounting technique used by firms to assess the profits earned by their investments in other companies and to reflect this in the profit and loss statement proportionally to their ownership level.

Equity Method

An accounting technique used to record investments in other companies where the investor has significant influence but does not fully control the company, typically 20%-50% ownership.