(a) Explain the type I and type II agency problem.

(5 marks)

(b) Assume that Starbucks is planning to buy new coffee machine. They can buy Dolce coffee machine which will cost 8000. The firm can use it for 3 years and each year it will incur maintenance cost of 500. Jacobs Dowe coffee machines will cost 9000 and can be used for 4 years. The maintenance cost of this machine is 400 per year. Which machine the company will buy, if required rate of return is 6% p.a.?

(8 marks)

(c) Explain transaction and economic exposure. How the firm can reduce transaction and economic exposure? Explain.

(12 marks)

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