- CFA Exams
- CFA Level I Exam
- Topic 3. Corporate Issuers
- Learning Module 3. Corporate Governance: Conflicts, Mechanisms, Risks, and Benefits
- Subject 1. Shareholder Conflicts and Management
CFA Practice Question
Which of the following situations does not represent an agency conflict?
A. A manager is choosing between two projects. He prefers the larger project even though it has lower NPV.
B. A manager fires an employee for charging personal expenses to the company for a business road trip.
C. A manager invests in riskier projects after borrowing funds in a debt issue.
Explanation: Firing an employee for charging personal expenses to the company is not an example of agency conflict. In this case, the manager is performing his duty as shareholders would like him to, maximize the firm's profits.
User Contributed Comments 5
| User | Comment |
|---|---|
| danlan | C may be good for shareholders, not debt issuers. |
| mirco | Could you not argue that borrowing funds lowers the WACC and thus allows the company to engage in projects which were not possible before (they had a negative NPV before)? |
| nike | if you borrow more, you get more debt and the required rate for equities will rise. WACC is not necessarily to be lower. |
| MFApassed | C is a conflict because bondholders want's co to have less risk to not default on interest and principal payments. Usually managers want to leverage more debt to get more return on equity investments that helps them to keep their job but puts the bondholders at risk. |
| Naren319 | C won't be appropriate as bond holders are not much concerned for funding to higher risky project as they will be charging higher rate of interest for such projects and also covenants or indentures will safe guard them.. |