Question: A Corp. is all equity financed. Its managers are currently engaging in some self-serving activities, such as taking significant time off playing golf, using corporate

A Corp. is all equity financed. Its managers are currently engaging in some self-serving activities, such as taking significant time off playing golf, using corporate funds to purchase items. Shareholder monitoring can curb these spending activities. Suppose that the cost of monitoring is equal to $400,000 and as a result of the monitoring, managerial misbehavior will be reduced and firm value will increase instantly by $10 million.

a. Will a shareholder who owns 0.1% of the company have the incentive to monitor the managers, and why? (Show the computation)

b. Will a shareholder who owns 5% of the company have the incentive to monitor the managers, and why? (Show the computation)

c. What is the minimum percentage ownership for a shareholder to have the incentive to monitor the managers? (Show the computation)

d. What inference can you draw from this question about the incentives of shareholders to monitor managers?

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