A Risk-Averse Manager Is Hired to Run a Firm for Shareholders

question 10

Multiple Choice

A risk-averse manager is hired to run a firm for shareholders. If the manager's effort can be observed and specified in a contract,which would be the best employment contract?

• A)a high-powered incentive contract to elicit the most effort.
• B)a fixed salary paid as long as the required effort is undertaken.
• C)a proportion of profits paid as long as the required effort is undertaken.
• D)a wage well in excess of his or her outside opportunity.

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Definitions:

Times Interest Earned

A ratio that measures creditor margin of safety for interest payments, calculated as income before interest and taxes divided by interest expense.

Income Tax Expense

The total amount of income tax a company reports as an expense in its income statement for a given period.

Interest Expense

The cost incurred by an entity for borrowed funds, representing the interest payments due to lenders or creditors during a specific period.

Current Ratio

A financial metric that evaluates a company's ability to pay off its short-term liabilities with its current assets.