Question

Part A) Examine the situations below. Which one is most likely to cause an agency problem?

a. forgoing a loan when doing so will create losses for the firm

b. refusing to lower selling prices if doing so will reduce the net profits

c. refusing to expand the company if doing so will lower the value of the equity

d. agreeing to pay bonuses based on the market value of the company stock rather than on the firm's level of sales

e. increasing current profits when doing so lowers the value of the firm's equity

Part B) Which of the following groups are involved in monitoring the top management of U.S. public corporations?

I. Shareholders
II. Board of Directors
III. Independent accountants
IV. Lenders

a. I only

b. I and II only

c. II and III only

d. I, II, and III

e. I, II, III, and IV

Part C) Which of the following statements are correct regarding Sarbanes-Oxley (SOX) and Dodd-Frank (DF)?

I. DF requires that public firms offer an advisory vote to shareholders on top executive compensation.

II. SOX requires that management certify that the firm's financials are materially accurate.

III. SOX compliance has made it easier for the U.S. to attract foreign listings of public firms.

IV. DF requires companies to disclose the ratio of CEO pay to the lowest paid line worker.

a. I and II only

b. I and III only

c. I, II, and III only

d. I, II, and IV only

e. I, II, III, and IV

*please answer all parts to the question*

Answer 1

Part A) e. increasing current profits when doing so lowers the value of the firm's equity

Agency problem exist when there is confict of interest between manager and the owner i.e shareholders. When current profit increases , managers will be appreciated by bonus however value of firm will decrease which will decrease wealth of share holders

Part B) b. I and II only

Shareholder and Board of directors are normally involved in monitoring top management of U.S public corporation

Part C) d. I, II, and IV only

Indroduction of SOX was considered as problamatic law for many foreign firm that wanted to list in USA

Hece only option III is false , rest are correct