An agency problem can be alleviated:a.when a firm is a sole proprietorship.b.by compensating managers in such a way that acting in the best interest of shareholders is also in the best interest of managers.c.by asking managers to take on more risk than they are comfortable taking.d.a) and b)e.a), b), and c)
Question
An agency problem can be alleviated:a.when a firm is a sole proprietorship.b.by compensating managers in such a way that acting in the best interest of shareholders is also in the best interest of managers.c.by asking managers to take on more risk than they are comfortable taking.d.a) and b)e.a), b), and c)
Solution
The correct answer is d. a) and b).
An agency problem arises when there is a conflict of interest between the needs of the principal (in this case, the shareholders) and the agent (the managers).
a) When a firm is a sole proprietorship, the owner is the manager and there are no other shareholders. Therefore, the interests of the owner-manager are aligned with the interests of the firm, alleviating the agency problem.
b) Compensating managers in such a way that acting in the best interest of shareholders is also in the best interest of managers can also alleviate the agency problem. This can be done through performance-based incentives, stock options, or other forms of compensation that align the interests of the managers with those of the shareholders.
c) Asking managers to take on more risk than they are comfortable taking does not alleviate the agency problem. In fact, it could exacerbate the problem as managers might make decisions that protect their own interests at the expense of the
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