Which one of the following statements is TRUE?
A) Outside shareholders will pay less for stock if they think the original owners will consume perquisites.
B) Creditors have a claim on a firm's earning stream through the dividend payments they receive.
C) An example of asset switching is an option to exchange one piece of real estate for another.
D) An agency cost is the wage required to pay someone who is hired to perform a service.
E) An example of an agency cost is when an attorney hires an expert witness for a trial.

Question

Quizplus · Accepted Answer

A) True because outside shareholders, anticipating that original owners might consume perquisites (perks) at the expense of the company's profitability, would value the stock less due to potential reduced returns. B) is incorrect because creditors do not receive dividends; they are paid interest on loans. C) is incorrect because asset switching typically refers to a firm changing the risk profile of its assets, not a real estate exchange option. D) is incorrect because an agency cost refers to the costs associated with resolving conflicts of interest between principals and agents, not the wage for a service. E) is incorrect because hiring an expert witness is a direct expense, not an agency cost which typically involves costs related to managing conflicts of interest within a corporation.

Which One of the Following Statements Is TRUE