Recall the last time you ate at an expensive restaurant where you paid the bill.

Now think about

the last time you ate at a similar restaurant, but your parents paid the bill. Did you order more
food (or more expensive food) when your parents paid?
Explain how this relates to the agency problem in corporations.
(Select all the choices that apply.)

A.
Your situation could never lead to an agency problem since your parents would only want the best
for you.

B.
In both situations there may be a lack of interest in controlling costs if those costs are not
borne directly by the person making the decision.

C.
While you may be faced with an agency problem (spending more when your parents are buying
than you would if you were paying), corporate managers are seldom faced with such decisions.

D.
The agency problem leads an individual (in your case) and corporate managers (in the
corporate setting) to put their own self-interest ahead of the interests of the
shareholders (your parents in your case).

You are the CEO of a company and you are considering entering into an agreement to have your
company buy another company. You think the price might be too high, but you will be the CEO of
the combined, much larger company. You know that when the company gets bigger, your pay and
prestige will increase. What is the nature of the agency conflict here and how is it related to
ethical considerations?
(Select all the choices that apply.)

A.
There is an ethical dilemma when the CEO of a firm has incentives that are opposite to
those of the shareholders.

B.
There is a legal issue when the CEO of a firm has incentives that are opposite to those of the
shareholders.

C.
In this case, you (as the CEO) have an incentive to potentially overpay for another
company (which would be damaging to your shareholders) because the value of the combined
company will improve.

D.
In this case, you (as the CEO) have an incentive to potentially overpay for another
company (which would be damaging to your shareholders) because your pay and prestige
will improve.
Consider the following potential events that might have occurred to Global on December 30,
2016. For each one, indicate which line items in Global's balance sheet would be affected and by
how much. Also indicate the change to Global's book value of equity.
a. Global used $19.7 million of its available cash to repay $19.7 million of its long-term debt.
b. A warehouse fire destroyed $4.7 million worth of uninsured inventory.
c. Global used $5.1 million in cash and $4.6 million in new long-term debt to purchase a $9.7
million building.
d. A large customer owing $3.1 million for products it already received declared bankruptcy,
leaving no possibility that Global would ever receive payment.
e. Global's engineers discover a new manufacturing process that will cut the cost of its flagship
product by more than 46%.
f. A key competitor announces a radical new pricing policy that will drastically undercut Global's
prices.

a.
Select the best choice below.)

C.
Long-term liabilities would decrease by $19.7 million, and cash would decrease by the same
amount. The book value of equity would be unchanged.

b. A warehouse fire destroyed $4.7 million worth of uninsured inventory.  (Select the best
choice below.)

A.
Inventory would decrease by $4.7 million, as would the book value of equity.

c. Global used $5.1 million in cash and $4.6 million in new long-term debt to purchase a $9.7
million building.  (Select the best choice below.)

C.
Long-term assets would increase by $9.7 million, cash would decrease by $5.1 million, and long-
term liabilities would increase by $4.6 million. There would be no change to the book value of
equity.

d. A large customer owing $3.1 million for products it already received declared bankruptcy,
leaving no possibility that Global would ever receive payment.  (Select the best choice below.)

D.
Accounts receivable would decrease by $3.1 million, as would the book value of equity.

e. Global's engineers discover a new manufacturing process that will cut the cost of its flagship
product by more than 46%.
(Select the best choice below.)

D.
This event would not affect the balance sheet.
f. A key competitor announces a radical new pricing policy that will drastically undercut Global's
prices.  (Select the best choice below.)

D.
This event would not affect the balance sheet.