In Which of the Following Cases Will the Agency Problem

question 4

Multiple Choice

In which of the following cases will the agency problem between shareholders and managers be the greatest?

• A) 100% of the common stock is owned by the founder of the company who decided to retire and hired a manager to run his business for him.
• B) The Johnson family owns 50% of the common stock of the company. The other 50% is owned by 5 mutual funds.
• C) The common stock of the company is owned by many diverse shareholders, with no shareholder owning more than 1% of the outstanding stock.
• D) All top managers in the company own significant amounts of stock and stock options.

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Definitions:

Sales Revenue

The earnings obtained through the sale of products or services during a certain timeframe.

Inventories

Assets held for sale in the ordinary course of business, in the process of production for such sale, or in the form of materials or supplies to be consumed in the production process or in the rendering of services.

Insurance Policy

A contract between an insurer and a policyholder that outlines the terms and conditions under which the insurer agrees to compensate the policyholder for losses under specified circumstances.

Retained Earnings

Profits that a company has earned to date, less any dividends or other distributions paid to the shareholders, often reinvested in the business or used to pay off debt.