Given a Series of Employment Contracts with the Same Slope

question 11

Multiple Choice

Given a series of employment contracts with the same slope (where slope refers to how the contract varies with changes in the firm's gross profits) but different intercepts (referring to the overall generosity of the contract) .Which of these is not a consideration in figuring out which of these intercepts the shareholders would decide to build into the contract offered to the manager?

• A) if too generous a contract is offered, this comes out of the firm's bottom-line profit.
• B) if too generous a contract is offered, the manager may become lazy and not exert the required effort.
• C) if the contract isn't generous enough, the manager will decide to work elsewhere.
• D) if the contract isn't generous enough, only low-ability managers will apply.

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Definitions:

IRR

The rate of return at which the sum of the present value of all cash inflows and outflows from an investment or project is zero.

MIRR

Modified Internal Rate of Return; a financial measure used to evaluate the attractiveness of investments, taking into account different financing costs and reinvestment rates.

Mutually Exclusive

Situations or events that cannot occur at the same time, indicating a choice must be made between them.

Required Rate of Return

Rephrased: The minimum percentage of profit or interest an investor expects from an investment to consider it worthwhile, factoring in the risk involved.