Which of the following statements is CORRECTσ
A) a good goal for a firm's management is maximization of expected eps.
B) most business in the u.s. is conducted by corporations, and corporations' popularity results primarily from their favorable tax treatment.
C) because most stock ownership is concentrated in the hands of a relatively small segment of society, firms' actions to maximize their stock prices have little benefit to society.
D) corporations and partnerships have an advantage over proprietorships because a sole proprietor is exposed to unlimited liability, but the liability of all investors in the other types of businesses is more limited.
E) the potential exists for agency conflicts between stockholders and managers.

Question

Quizplus · Accepted Answer

The potential for agency conflicts between stockholders and managers is a well-known phenomenon in corporate finance. When managers have control over a firm's assets, they may prioritize their own interests or goals over those of the stockholders. This misalignment of incentives can create conflicts and financial losses for the stockholders, making it important for firms to adopt appropriate corporate governance mechanisms to mitigate the agency costs.

The other options are incorrect because:
A) Maximization of EPS may not be the optimal goal for a firm as it ignores the risk and cost of capital. 
B) While corporations may have favorable tax treatment, their popularity cannot be solely attributed to this factor, and businesses can also be conducted by sole proprietorships or partnerships. 
C) The actions of firms to maximize stock prices can benefit society through increased employment, investments, and economic growth. 
D) While it is true that sole proprietors have unlimited liability, partnerships and corporations also have their own unique advantages and disadvantages.

Which of the Following Statements Is CORRECTσ