IMC 1.7

Question 1

How do capital markets allow beneficial ownership and control of capital to be separated?

Answer 1

Shareholders (owners) provide funds; managers control use of funds.

Question 2

Distinguish between beneficial owners (principals) and agents.

Answer 2

Principals = shareholders. Agents = managers, advisers, intermediaries.

Question 3

How does the conflict between principals and agents create an agency problem?

Answer 3

Managers may act in their own interests, not shareholders’.

Question 4

Identify examples of agency costs.

Answer 4

Costs from agency conflict: misuse of assets, higher perks, insider deals, higher cost of capital.

Question 5

Identify reasons why reducing the agency problem benefits profession and society.

Answer 5

Builds trust, lowers cost of capital, increases efficiency, supports economic growth.