Question 3 (8 marks) Which of the following actions are not an agency costs and

Question

Question 3 (8 marks) Which of the following actions are not an agency costs and explain why? I. foregoing an investment opportunity which would add to the market value of the owner's equity II. paying a dividend to each of the existing shareholders III. purchasing new equipment which increases the value of each share of stock IV. hiring outside auditors to verify the accuracy of the company financial statements Question 4 (4 marks) Which form of business structure(s) can potentially face agency problems and which faces the greatest agency problems and explain why? I. sole proprietorship II. general partnership III. limited partnership IV. corporation Problems Problem 1 (10 marks) You are attending a job interview for a position that will involve presenting the financial statements of the firm. You have been provided the following financial information:

Prepare (in good form on an excel spreadsheet) the cash flow statement for Seat of Your Pants Airline. Remember to label and show your work for any calculations that are required..

Explanation / Answer

Question 3:

Options I and IV are correct.

Agency cost arises due to conflict between principal (shareholders) and agent (managers). The option I talks about opportunity cost and that is not an agency cost.

Option IV is a part of auditing to check the fairness and accuracy of financial statements. That is also not an agency cost.

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