Debt Can Reduce Agency Costs Between Shareholders and Management,but

question 76

Multiple Choice

Debt can reduce agency costs between shareholders and management,but

• A)only if the firm is totally up to its eyeballs in debt.
• B)only to the extent that the firm can commit all of its free cash flow.
• C)excessive debt can create its own agency conflicts.
• D)debt is best used as a corporate governance mechanism by young companies with limited cash reserves.

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Definitions:

Denominator Level

In cost accounting, it’s the level of activity used to allocate fixed costs to products or services, often representing the production capacity.

Budget Variance

This is the difference between the budgeted or planned amount of expense or revenue, and the actual amount incurred or received.

Standard Hours

The set amount of time expected to complete a job or task, often used for planning and assessing the efficiency of operations.

Volume Variance

The difference between the budgeted volume of production and the actual volume, which affects the fixed overhead costs.