A Type of Agency Problem That Results in Shareholders Gaining

question 109

Multiple Choice

A type of agency problem that results in shareholders gaining from decisions that increase the risk of the firm sufficiently,even if they have negative NPV is:

• A)asset substitution.
• B)debt overhang.
• C)underinvestment.
• D)cashing out.

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Definitions:

Average Sale Period

The average amount of time it takes for a company to convert its inventory into sales.

Operating Cycle

The duration of time it takes for a company to purchase inventory, sell the goods, and receive cash from sales.

Average Sale Period

The average time it takes for a company to convert its inventory into sales.

Times Interest Earned

An indicator of how well a business can fulfill its debt repayments by evaluating its earnings prior to interest and taxes against its interest expenditures.