Not able to comprehend the explanation given.
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I think the question is trying to find the statement which shows agency costs between management and shareholders, option C states there will be no issues to debt holders so there are no agency costs, option A is stating that equity shareholders are also going to benefit (regardless of negative impacts to debt providers) and thus there are no agency costs between management and shareholders. Option B is correct since it shows highest level of agency costs by implying that since management’s compensation comprised of options has 0 value at current price, they might want to take this acquisition which will be extremely risky (and thus negative impacts towards shareholders) but if it works out it will give a very large payoff to management and shareholders might not want to take so much risk because the company losing value due to failed acquisition would not be good for shareholders, hence option B shows significant agency cost between management and shareholders.Hope this helps
Agency costs refer to the costs associated with the conflicts of interest between a firm’s management and shareholders. Risks are borne by the company’s shareholders, while the management’s compensation is often tied to company performance, which may lead to excessive risk taking by the managers. Because shareholders are aware of this conflict, they will take steps to minimize these costs, and the net result is called the net agency cost of equity.
options B is example of agency cost