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Rupert Jones, a manager with Oswald Technologies, is confused about agency costs of equity and how they can be managed at his firm. To try to gain a better understanding about agency costs, Jones asks Karrie Converse, a well known consultant for an explanation. In their conversation, Converse makes the following statements:
Statement 1: Costs related to the conflict of interest between managers and owners of a business can be eliminated through a combination of bonding provisions and adequate monitoring through a quality corporate governance structure.
Statement 2: The less a company depends on debt in its capital structure, the lower the agency costs the company will tend to have.
Are Converse’s statements concerning the agency costs of equity correct? A. Both are correct. B. Only one is correct. C. Both are incorrect. |