{ "key_pair_value_system": true, "answer_rating_count": "", "question_feedback_html": { "html_star": "", "html_star_feedback": "" }, "answer_average_rating_value": "", "answer_date_js": "2024-06-28T07:02:47-04:00", "answer_date": "2024-06-28 07:02:47", "is_docs_available": null, "is_excel_available": null, "is_pdf_available": null, "count_file_available": 0, "main_page": "student_question_view", "question_id": "4259917", "url": "\/study-help\/questions\/you-are-engaged-by-the-owner-of-a-small-firm-4259917", "question_creation_date_js": "2024-06-28T07:02:47-04:00", "question_creation_date": "Jun 28, 2024 07:02 AM", "meta_title": "[Solved] You are engaged by the owner of a small f | SolutionInn", "meta_description": "Answer of - You are engaged by the owner of a small firm to recommend a one-year compensation contract for the firm's top manager. | SolutionInn", "meta_keywords": "engaged,owner,small,firm,recommend,one-year,compensation,contract,s,top,manager,concerned", "question_title_h1": "You are engaged by the owner of a small firm to recommend a one-year compensation contract for the firm's top manager. The owner is concerned", "question_title": "You are engaged by the owner of a small firm to recommend", "question_title_for_js_snippet": "You are engaged by the owner of a small firm to recommend a one year compensation contract for the firm's top manager The owner is concerned about cash flow and feels that in previous years the manager may have been shirking You ascertain that if the manager works hard (a1), the firm's ultimate cash flow from current year operations will be either $338 or $142 (before manager compensation) with probability 0 6 or 0 4, respectively If the manager shirks (a2), cash flow will be $338 or $142 with probability 0 2 or 0 8, respectively Cash flow, however, will not be known until after the manager's one year contract has expired As an expert in GAAP, you know that if cash flow will be $338, net income for the year will be $456 with probability 0 8 and $63 with probability 0 2 If cash flow will be $142, net income will be $456 with probability 0 1 and $63 with probability 0 9 You recommend that the manager's contract be based on reported net income You interview the manager and find that he is rational, risk averse with utility for money equal to the square root of the amount of money received, and effort averse with disutility of effort of 2 5 if he works hard and 1 8 if he shirks The manager's reservation utility is 4 Required a What percentage of net income must the manager be offered so that he will accept the contract and work hard b The owner is risk neutral, with utility equal to the dollar amount of the payoff, net of the manager's compensation Under the first best contract the owner expected utility is 217 35 What is the agency cost of the contract in part a Show calculations ", "question_description": "

You are engaged by the owner of a small firm to recommend a one-year compensation contract for the firm's top manager. The owner is concerned about cash flow and feels that in previous years the manager may have been shirking. You ascertain that if the manager works hard (a1), the firm's ultimate cash flow from current year operations will be either $338 or $142 (before manager compensation) with probability 0.6 or 0.4, respectively. If the manager shirks (a2), cash flow will be $338 or $142 with probability 0.2 or 0.8, respectively. Cash flow, however, will not be known until after the manager's one-year contract has expired. As an expert in GAAP, you know that if cash flow will be $338, net income for the year will be $456 with probability 0.8 and $63 with probability 0.2. If cash flow will be $142, net income will be $456 with probability 0.1 and $63 with probability 0.9. You recommend that the manager's contract be based on reported net income. You interview the manager and find that he is rational, risk-averse with utility for money equal to the square root of the amount of money received, and effort-averse with disutility of effort of 2.5 if he works hard and 1.8 if he shirks. The manager's reservation utility is 4. Required a. What percentage of net income must the manager be offered so that he will accept the contract and work hard? b. The owner is risk-neutral, with utility equal to the dollar amount of the payoff, net of the manager's compensation. Under the first best contract the owner expected utility is 217.35. What is the agency cost of the contract in part a? Show calculations.<\/p>", "transcribed_text": "", "related_book": { "title": "Managerial Accounting Tools for Business Decision Making ", "isbn": "1118856996, 978-1118856994", "edition": "4th Canadian edition", "authors": "Jerry J. Weygandt, Paul D. Kimmel, Donald E. Kieso, Ibrahim M. Aly", "cover_image": "https:\/\/dsd5zvtm8ll6.cloudfront.net\/si.question.images\/book_images\/1190.jpg", "uri": "\/textbooks\/managerial-accounting-tools-for-business-decision-making-4th-canadian-edition-1190", "see_more_uri": "" }, "free_related_book": { "isbn": "1032486341", "uri": "\/textbooks\/the-soviet-union-looks-ahead-1st-edition-978-1032486345-283530", "name": "The Soviet Union Looks Ahead", "edition": "1st Edition" }, "question_posted": "2024-06-28 07:02:47", "see_more_questions_link": "\/study-help\/questions\/business-economics-2023-September-08", "step_by_step_answer": "The Answer is in the image, click to view ...", "students_also_viewed": [ { "url": "\/identify-the-four-types-of-control-activities-and-describe-how", "description": "Identify the four types of control activities and describe how each type contributes to effective internal control.", "stars": 3 }, { "url": "\/study-help\/industrial-organizational-psychology-understanding-the-workplace\/what-does-modern-portfolio-theory-ie-traditional-finance-say-about-1983740", "description": "What does modern portfolio theory (i.e., traditional finance) say about how an investor should form an optimal stock portfolio?", "stars": 3 }, { "url": "\/its-business-involves-production-of-both-stock-items-and-custom", "description": "Its business involves production of both stock items and custom pieces for doctors at research hospitals. 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