Corporate Finance - Corporate Finance Section 1
- Option : B
- Explanation : An increase in market value of a company can benefit management because their compensation is likely to be linked with company value. Shareholders directly benefit from higher market value. Customers are least likely to benefit from an increase in market value of the company.
7. Which of the following is least likely an interest of the government as a stakeholder?
- Option : B
- Explanation : Management compensation does not directly impact the government's interest as a stakeholder. Being a tax collector, the government is interested in the company's profits whereas as in order to safeguard the interests of the public the government would want to ensure the environmental impact of the business's activities is not negative.
8. An agency relationship is most likely described as:
- A
a relationship arising when a principal is hired to act in the best interest of the agent and involves obligations, trust and expectations of loyalty.
- B
a relationship arising when a principal hires an agent to perform particular tasks or services where the agent is expected to act in the best interests of the principal.
- C
a relationship arising when a principal hires an agent to perform particular tasks or services where the agent is expected to act in the best interests of the stakeholders.
- Option : B
- Explanation : The agency relationship is a relationship arising when a principal hires an agent to perform particular tasks or services where the agent is expected to act in the best interests of the principal.
- Option : A
- Explanation : When shareholders have a high risk tolerance, they would support venturing into risky projects. The management however, would be more risk averse in order to secure their employment.
- Option : C
- Explanation : In the given ownership structure the controlling shareholder would have more influence than minority shareholder and can use this position to the detriment of minority shareholders.
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