Question

There are two major types of agency problems in corporate finance: Type 1 agency problem: Free...

There are two major types of agency problems in corporate finance:

Type 1 agency problem: Free Cash Flow Diversion/Squandering. Conflict of interest between managers and shareholders.

Type 2 agency problem: Debt Overhang/Under-investment. Conflict of interest between bondholders and shareholders.

1. If a company increases its leverage, then type 1 agency problems will:

a)Increase b)Decrease c)Not change

2. If a company decreases its leverage, then type 2 agency problems will:

a)Increase b)Decrease c)Not change

3. Due to a decrease in dividend per share, type 1 agency problems will:

a)Increase b)Decrease c)Not change

4. Due to a decrease in dividend per share, type 2 agency problems will:

a)Increase b)Decrease c)Not change

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Answer #1

There are two major type of agency problems in the corporate finance and

Type 1 agency problem:- Free cash flow diversion squandering consists of interest between managers and shareholders.

Type 2 agency problem:- Debt overhang under investment conflict of interest between bondholders and shareholders.

1) If a company increases its leverage then type 1 agency problem will

  • B) Decrease.

2)If a company decreases its leverage then type 2 agency problem will

  • A) Increase

3) Due to decrease in dividend per share type 1 agency problem will

  • B) Decrease

4) Due to decrease in dividend per share type 2 agency problem will

  • B) Decrease
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