Question

1. Summarize what is type II agency cost of equity and its reasons.

2. Summarize what is agency cost of debt and how to mitigate it.

3. Firm A hold 55% of Firm C.

Firm B hold 45% of Firm C.

Firm C hold 60% of Firm F

Firm D hold 40% of Firm F.

Firm A ' cash flow right on firm F is_____  %.

Firm A ' control right on firm F is______  %.

Answer 1

1) Type II Agencey cost arise between the owners of the Enterprises. Basically there are two types of owner one who have Controlling Interest in the Enterprise and other one holds the minority Interest. Main reason of this cost arises when Controlling Shareholder fail to assure minority Shareholder that they are not exploited.Here Minority Shareholder act as a Principal and Controlling SH act as an agent of the Enterprises..

2) When there is a conflict between the Debtholder and Equityholder, anyone of them put some constraint on the way fund of the company can be use. Due to which sometime Cost of Debt increases which is also termed as Agency cost of Debt. We can use some monitory technique or debt trustee, debt indenture to mitigate agency cost of Debt.

3) Cashflow right: 55% * 60% = 33%

4) 33%