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CMA Intermediate · Financial Management and Business Data Analytics · Introduction to Financial Management

Which of the following is an agency cost that shareholders bear specifically to monitor managers and align their interests with shareholders?

Fees for independent audit and oversight of managerial performance are agency costs because they are monitoring costs incurred by owners to control the agents' behaviour. Dividends, raw material purchases and depreciation are normal business or distribution items and do not arise from the principal-agent conflict.

  1. ADividend paid to equity shareholders out of profits
  2. BFees paid to an independent audit committee consultant and the cost of external audit of managerial performanceCorrect
  3. CRaw material purchase cost for production
  4. DDepreciation charged on plant

Explanation

Monitoring costs, such as audits and oversight of managers' actions, are classic agency costs. Dividends, raw material cost and depreciation are ordinary business or distribution items, not costs of controlling an agency conflict.

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