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

Which of the following is a typical agency cost arising from the conflict between shareholders (principals) and managers (agents)?

Monitoring expenditure such as audit fees and managerial incentives like ESOPs are agency costs, because they are incurred to align managers' behaviour with shareholders' interests. Dividends, interest and depreciation are normal financing or operating items and do not arise from the principal-agent conflict.

  1. ADividend paid to equity shareholders out of profits
  2. BExpenditure on monitoring such as audit fees and managerial performance-linked incentives such as ESOPsCorrect
  3. CInterest paid to debenture holders on due dates
  4. DDepreciation charged on plant and machinery

Explanation

Agency costs include the costs of monitoring managers (audits, reporting) and incentive schemes (ESOPs, bonuses) designed to align managers with shareholders. Dividends, interest and depreciation are ordinary financing or operating items, not costs of resolving the agency conflict.

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