D delaying maintenance expenditure in order to meet current prot targets as this will result in prot-related bonuses for a manager Question 5 South Ltd has a remuneration policy of paying a bonus to senior managers of 0.1 per cent of prots above a target prot of $50 million. The maximum bonus payable is $750 [100. South's reported prot forecast is $40 million per year for the next two years. According to agency theory, which of the following would be the most likely management actions? Select which options are correct. A Defer maintenance expenditure, saving $2 million in expenses. B Undertake all preventative maintenance in the current year, reducing prots by $6 million. C Bring forward a review of asset values, resulting in an asset write-down of $12 million against current prots. D Capitalise research and development expenditure, which would have been expensed, resulting in an increase to prots by $3 million. Short questions 1. Describe how information asymmetry creates agency problems. 2. What is 'stewardship theory\" and how does it relate to corporate governance? Case study 1. There are two important types of information asymmetries that give rise to two different agency problems: adverse selection and moral hazard. Adverse selection arises 'om hidden knowledge and creates an agency cost when an aspect of a decision is known to the agent but not to the principal. A moral hazard arises when the shareholders (principal) bear the cost of the manager's (agent) risk taking which creates an agency cost. Outline one example for adverse selection and moral hazard respectively and compare the difference between these two types of information asymmetries. Discuss what solutions are available to companies with high agency costs