Problem 1: Which of the following actions would tend to reduce conflicts of interest between stockholders and bondholders?
Including restrictive covenants in the company's bond indenture (which is the contract between the company and its bondholders).
Compensating managers with more stock options and less cash income.
The passage of laws that make it harder for hostile takeovers to succeed.
A government regulation that banned the use of convertible bonds.
Have the firm use only long-term debt, e.g., debt that matures in 30 years or more rather than in less than one year.
Problem 2: The U.S. Treasury offers to sell you a bond for $613.81. No payments will be made until the bond matures 10 years from now, at which time it will be redeemed for $1,000. What interest rate would you earn if you bought this bond at the offer price?
5.91%
6.71%
7.10%
5.59%
5.00%
Problem 3: Temple Square Inc. reported that its retained earnings for 2005 were $490,000. In its 2006 financial statements, it reported $60,000 of net income, and it ended 2006 with $510,000 of retained earnings. How much were paid as dividends to shareholders during 2006?
$20,000
$25,000
$30,000
$35,000
$40,000
Problem 4: Collins Inc's latest net income was $1 million, and it had 200,000 shares outstanding. The company wants to pay out 40% of its income. What dividend per share should the company declare?
$1.60
$1.70
$1.80
$1.90
$2.00
Problem 5: The Federal Reserve sells $50 billion of short-term U.S. Treasury securities to the public, other things held constant, what would be the most likely effect on short-term securities prices and interest rates?
Prices and interest rates will both rise.
Prices will rise and interest rates will decline.
Prices and interest rates will both decline.
Prices will decline and interest rates will rise.
There is no reason to expect a change in either prices or interest rates.
Problem 6: Your uncle would like to limit both his interest rate price risk (the risk that rising rates will cause the value of his bonds to decline) and his default risk, but he would still like to invest in corporate bonds. He is considering the following bonds. Which of these bonds would best meet his criteria?
AAA bonds with 10 years to maturity.
BBB perpetual bonds.
BBB bonds with 10 years to maturity.
AAA bonds with 5 years to maturity.
BBB bonds with 5 years to maturity.