Skip to content

CA Intermediate · Financial Management and Strategic Management · Scope and Objectives of Financial Management

Under the agency problem in a company, which of the following is an example of agency cost borne by shareholders to control managers' behaviour?

Auditor fees and performance-linked stock options are agency costs, because shareholders incur them to monitor managers and align their interests with owners. Dividends, debenture interest and depreciation are normal payments or charges, not costs of resolving the owner-manager conflict.

  1. ADividend paid to equity shareholders
  2. BFees paid to an external auditor and costs of granting performance-linked stock options to align managers' interestsCorrect
  3. CInterest paid on debentures
  4. DDepreciation charged on plant

Explanation

Agency costs arise from conflicts between owners and managers, and include monitoring costs (such as audit fees) and incentive costs (such as performance-linked ESOPs). Dividends, interest and depreciation are ordinary returns or expenses, not costs of controlling the conflict.

Did you get it right without looking?

One question tells you little. A timed set on Scope and Objectives of Financial Management shows your real accuracy, how long you take and where you lose marks.

Practise Scope and Objectives of Financial ManagementFree diagnostic mock

More Scope and Objectives of Financial Management questions