Assume that a manager has been awarded an executive stock option that allows her to purchase 1,000 shares of the company's stock at a price of $10 per share. The current price of the company's stock is $8.25 per share. This executive stock option helps reduce the agency problem because:

A. the manager has an incentive to take actions that will increase the company's stock price and make her option more valuable.
B. the manager has an incentive to take actions that will decrease the company's stock price and make her option more valuable.
C. the manager has an incentive to take actions that will decrease the company's stock price even though these actions will make her option less valuable.

Correct Answer: A

The executive stock option allows the manager to buy the company's stock at a price of $10 per share regardless of the current market price of the stock. This means that the option becomes more and more valuable as the market price of the stock exceeds $10 per share. As a result, the manager has an incentive to work to increase the value of the company's stock, and the agency problem is decreased.