An example of an agency cost is:
A) a manager turning down a value-contributing project because of its risks.
B) a manager expensing a lavish dinner on the company expense report.
C) a manager using too little debt within the firm's capital structure because of the additional risk associated with debt.
D) all of the above.

Question

Quizplus · Accepted Answer

A manager expensing a lavish dinner on the company expense report is an example of agency cost as it is a personal benefit for the manager at the expense of the company. Option A is not an example of agency cost as the manager is making a rational decision based on the risks involved in the project. Option C is also not an example of agency cost as the manager is trying to minimize the financial risk for the company.

An Example of an Agency Cost Is