FINANCIAL MANAGEMENT THEORY AND PRACTICE (FIN101) UPDATED Questions and CORRECT Answer

Answers to the questions A. An agency relationship is a fiduciary where the actions of an agent are exchanged with a third party. It results from a consent from one party to the other that a third party shall act on behalf of the first party. In this case, there is no agency conflict. This is mainly because agency conflict arises when the proprietor owns less than 100% of the common stock of the business. Here, the owner is the only employee, and the entire company belongs and is owned by you thus presenting a 100% ownership of the entity. B The expansion of the business and the hiring of more workers will raise agency problems. This is because an agency relationship will arise between you and the employee if you hire him or her to execute some duties within the business or if you delegate powers and ability to make decisions. C One agency conflict that would arise in such a case is that of conflict of interest. Here, the conflict of interest in dealing with perquisites arise. When other people have interests in the business stock, the cost and privilege of perquisites are shared meaning there is a conflict of interest. D