Which one of the following statements is TRUE?
A) An example of asset switching is when a company borrows for a new manufacturing facility but then uses it
To repurchase its own stock.
B) An example of an agency cost is when an attorney hires an expert witness for a trial.
C) The commission required by the Federal Housing Agency for a small business loan is an example of
An agency cost.
D) An example of an agency cost is the salary of the agent hired to work for the principal.
E) Creditors have a claim on a firm's earning stream through the dividend payments they receive.

Question

Quizplus · Accepted Answer

Asset switching is when a company borrows for a specific purpose but uses the funds for a different purpose. In this case, the company borrowed for a new manufacturing facility but used the funds to repurchase its own stock, which is a form of asset switching. The other statements are incorrect. An agency cost is a cost incurred from conflicts of interest between management and shareholders, such as the cost of monitoring management or the cost of shirking by management. The commission required by the Federal Housing Agency for a small business loan is simply an administrative cost. The salary of an agent hired to work for the principal is a compensation cost, not an agency cost. Creditors have a claim on a firm's assets, not earnings stream, through collateral and other security measures.

Which One of the Following Statements Is TRUE