Angelo is an executive in a company that provides auto loans. Initially, he rece
ID: 1092085 • Letter: A
Question
Angelo is an executive in a company that provides auto loans. Initially, he receives 10% of the amount of the loans he makes in the first year. He can loan to two groups of customers. Customers in one group have excellent financial histories and repay their loans on time. Loans to this group produce revenue of $5 million this year, so the firm nets $4.5 million after paying Angelo. Customers in the second group are much more likely to default. This deadbeat group produces $50 million in revenue this year, but the defaults in the second year from lending to this group costs the firm $70 million. Suppose .Angelo can provide loans to only one of the two groups in any given year. If he loans to the safer group he gets to keep his job for the following year. If he loans to the deadbeat group he will be fired the following year as the firm starts realizing loan losses. Assume Angelo is only interested in working for two years. What should be his salary maximization strategy? If .Angelo wants to maximize his earnings over two years what will he do in each year? (ignoming the time value of money) In Year 1, .Angelo should loan to the [?] group and in Year 2 should loan to the Would his firm gain by using a system of deferred compensation? From using a system of deferred compensation, the firm would benefit by eliminating claw backs. would benefit by reducing agency problems. would suffer from increased liability. would suffer from increased corporate governance. would benefit from specialization.Explanation / Answer
1. Group 1 with excellent credit histories (blank 1), second group with customers likely to default
2. B would benefit by reducing agency problems