1. Which of the following is the best example of an agency problem?

Assume the
company is paying the employees’ travel expenses.
a. Juan, the chief financial officer, travels to France to meet with the bank that is
loaning firm money to build a factory in France. While in France, he tours Paris.
b. Mike, the president, travels to China to attend an international convention
related to the company’s line of business. While there, he tours the Great Wall
of China.
c. Ann, the controller, travels to Orlando, Florida to visit Disney World with
friends. While there, she talks with her friends about employment opportunities
at the firm.
d. Luisa, the marketing director, travels to California to attend a sales convention.
While there, she visits Disneyland.
2. Which one of the following represents the best effort to reduce the agency problem?
a. Paying senior managers, a cash bonus each year based on the number of people
employed by the company
b. Giving senior managers bonuses consisting of shares of company share
whenever company improves its production efficiency
c. Increasing the salary of the company president every time the company opens a
new store
d. Providing company cars to all managers employed by the firm for more than
one year
3. When owners are managers, a firm will have agency costs.
a. True
b. False
4. Which of the following statement is true?
a. The management board is the agent
b. The management board is the principal
c. Self-interest plays no role
d. Information asymmetry does not exist
5. Examples of behaviours that create agency costs of debt include situations where the
borrowing entity:
 a. Promises new debtholders equal or higher-ranking debt than existing
debtholders
b. Pays minimal dividends
c. Invests in high-risk projects not known to debtholders
d. A and C only
e. B and C only
6. Agency theory assumes that the interests of principals and agents are generally aligned.
a. True
b. False
7. Which one of the following statements best describes characteristics likely to be found
in agency relationships?
a. An agent will find it relatively easy to achieve the best interests of the principal
in most agency relationships
b. It is necessary to monitor an agent extensively, even where that agent
voluntarily assumes the imposition of high bonding costs
c. Agents who are highly bonded will be expected to try to maximise the returns
of their principal and will be expected also to seek returns for themselves
d. Agents will often not provide sufficient signalling to principals. It is principally
this factor that results in principals finding it necessary to engage in and pay for
monitoring
8. Which one of the following would not be an example of an agency cost?
a. Audit fees
b. Dividends
c. Delegated authorities
d. Information asymmetry
9. Which of the following can be considered opportunistic residual loss behaviour by an
agent?
i. Purchase of an expensive painting for the managing director’s office
ii. Investing in technology that will substantially reduce short-term profit,
but yield returns in the longer term
iii. Suspending negotiations with potential acquisition target because it will
not enhance shareholder wealth
iv. Delaying maintenance expenditure in order to meet current profit targets
as this will result in profit-related bonuses for a manager
 a. i and ii
b. i and iv
c. ii and iii
d. iii and iv
10. West Ltd has a remuneration policy of paying a bonus to senior managers of 0.1 per
cent of profits above a target profit of RM50 million. The maximum bonus payable is
RM750 000. West’s reported profit forecast is RM40 million per year for the next two
years. According to agency theory, which of the following would be the most likely
management actions?
i. Defer maintenance expenditure, saving RM2 million in expenses
ii. Undertake all preventative maintenance in the current year reducing
profits by RM6 million
iii. Bring forward a review of asset values, resulting in an asset write-down
of RM12 million against current profits
iv. Capitalise research and development expenditure, which would have
been expensed, resulting in an increase to profits by RM3 million
a. i and ii
b. i and iv
c. ii and iii
d. iii and iv
11. What does the following statement define?

‘A contract under which one or more persons engage another person to perform some
service on their behalf.’

a. Accountability
b. Agency theory
c. Principal theory
d. Substance over form
12. Which of the following are examples of agency costs?
i. Directors’ salaries
ii. External audit fees
iii. Finance department salaries
a. i only
b. ii only
 c. i and ii only
d. i, ii and iii
13. Statements:
i. Agency theory relates to the relationship between management and
employees
ii. Agency theory relates to middlemen
a. Both are correct
b. Both are incorrect
c. (i) is correct (ii) is incorrect
d. (ii) is correct (i) is incorrect
14. Which of the following regarding agency theory is correct?
a. Agency theory only applies to large entities
b. Agents act in the best interest of the principal
c. Agents are assumed to be in a position of power
d. Agency theory defines the relationship between agents and directors
15. Which of the following is not an agency cost?
a. Residual loss
b. Bonding costs
c. Congruency costs
d. Monitoring costs
16. Which of the following regarding residual loss is correct?
a. Bonding costs do not have an effect on residual loss
b. Residual loss is incurred by the agent because an agency relationship exists
c. Under agency theory, residual loss can be reduced to zero by good governance
d. A reduction in residual loss is likely to be the result of an increase in monitoring
costs
17. __________ is concerned with the branch of economics relating the behaviour of
principals and their agents
a. Financial management
b. Agency theory
c. Profit maximization
d. Social responsibility
18. The agency relationship exists between
a. Shareholders and managers
 b. Auditors and managers
c. Shareholders and stakeholders
d. Stakeholders and managers
19. The agency problem exists because
a. Managers may be interested in maximising their own earnings
b. Shareholders have to rely on management to safeguard the assets of the business
c. Managers may be interested in short term gains over long term stability
d. All of the above
20. According to agency theory, the following are examples of bonding costs
a. Auditing the financial reports
b. Putting in place operating rules
c. Linking remuneration to performance
d. All of the above
21. The cost of monitoring management is considered to be a (an)
a. Bankruptcy cost
b. Transaction cost
c. Agency cost
d. Institutional cost
22. Managers never own complete responsibility for the all the decisions made by them
since they are not the owners of the business is the assumption of
a. Equity theory
b. Expectancy theory
c. Agency theory
d. Contingency theory