Which one of the following statements is TRUE?
A) Asset switching occurs when a company borrows money for a safe investment but uses it for a
Risky investment.
B) An example of an agency cost is when the board of directors pays a dividend to shareholders.
C) An example of an agency cost is when an attorney hires an expert witness for a trial.
D) The commission required by the Federal Housing Agency for a small business loan is an example of
An agency cost.
E) An example of an agency cost is the salary of the agent hired to work for the principal.

Question

Quizplus · Accepted Answer

EAsset switching refers to a situation where a company borrows money for a safe investment but then uses it for a riskier investment, often to the detriment of the lenders. This is a classic example of agency problems where the interests of the company's managers (agents) diverge from those of the lenders (principals). Additionally, the salary of an agent hired to work for the principal is a direct example of an agency cost, as it represents the cost incurred by the principal to ensure that the agent acts in the principal's best interest.

Which One of the Following Statements Is TRUE