ACCA Strategic Professional · Advanced Financial Management · Strategic business and financial planning for multinational organisations
In a multinational group, the board of the parent company is considering a project that offers a positive NPV but would sharply increase the risk of the group's debt. Which agency conflict does this most directly illustrate?
The conflict is between shareholders and lenders. Shareholders benefit from the upside of riskier projects while limited liability caps their loss, so wealth can move from debt holders to equity. Lenders usually respond with covenants and higher required returns to protect themselves.
- AShareholders and lenders, because shareholders may favour risky projects that transfer wealth from debt holdersCorrect
- BManagers and shareholders, because managers prefer lower pay
- CEmployees and customers, because wages rise with prices
- DGovernment and lenders, because interest is tax deductible
Explanation
Shareholders hold a residual claim with limited liability, so they gain from upside on risky projects while lenders bear more of the downside. This is the classic shareholder-lender agency conflict, usually managed with restrictive covenants. The manager-pay option does not describe a risk transfer to debt holders.
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