Understanding Corporate Agency Problem, Money Market Securities, Bond Issues, and Finance Capital

Identifying Agency Problems in the Corporate World

1. (15 points) Using a real example, identify and describe an agency problem in the corporate world. Make sure that you distinguish the agent from the principal in your description. 2. (10 points) Describe the following money market securities: (a) Treasury bills, (b) commercial paper, and (c) negotiable certificates of deposits 3. (10 points) RM International wishes to sell $100 million of bonds whose net proceeds will be used in the acquisition of Little Brooks. The underwriter believes that the 100,000 bonds can be sold to the public at their $1,000 par value and estimates that its administrative costs will be $3.5 million. The selling costs will be 0.1% of the sale price. If the underwriter requires a profit equal to 0.75% of the sale price, how much will the spread per bond have to be, in dollars, to cover its costs and profits? 4. (10 points) You purchased a 90-day maturity, $100,000 par value Treasury bill for $98,000. (1) Calculate the annualized bank discount yield paid by the T-bill. (2) If you sell it for $99,000 after 30 days, what is your holding period yield? 5. (15 points) From the perspective of a corporation, discuss the differences between debt and equity capital. 6. (21 points) The required rate of return on a bond depends on the risk characteristics of the bond when issued, taxation treatment, bonds’ liquidity, and other factors. Which bonds will have the higher coupon rate, all else equal? Briefly explain why. a. Secured debt vs. a debenture b. Subordinated debenture vs. senior debt c. A callable bond vs. a non-callable bond d. Income bond vs. a conventional bond e. Convertible bonds vs. conventional bond f. A corporate bond rated AAA by S&P vs. a “junk bond” g. Municipal bonds (which are free from most taxes) vs. taxable bonds 7. (9 points) Slater Lamp Manufacturing has an outstanding issue of preferred stock with an $80 par value and an 11% annual dividend. (1) What is the annual dollar dividend? If it is paid quarterly, how much will be paid each quarter? (2) If the preferred stock is noncumulative and the board of directors has passed the preferred dividend for the last 3 years, how much must be paid to preferred stockholders this year before dividends are paid to common stockholders? (3) If the preferred stock is cumulative and the board of directors has passed the preferred dividend for the last 3 years, how much must be paid to preferred stockholders before dividends are paid to common stockholders? 8. (Internet Activities; 10 points) a. We know that if a corporation is to maximize shareholder wealth, the interests of the managers and the shareholders must be aligned. The simplest way to align these interests is to structure executive compensation packages appropriately to encourage managers to act in the best interests of shareholders through stock and option awards. However, has executive compensation gotten out of control? Take a look at the Executive Pay Watch Web site at https://aflcio.org/paywatch to see to whom top salaries have gone by clicking on “Highest Paid CEOs.” What are the most recent total compensation packages for the head of Tesla, Inc. (TSLA), Apple Inc. (APPL), Wal-mart (WMT), J P Morgan Chase & Co (JPM), and Netflix (NFLX)? b. Go to Yahoo! Finance (http://finance.yahoo.com) and enter the symbol for Alphabet (GOOG) in the “Enter Symbol(s)” box at the top of the page. What price did it last trade at? What is the day’s price range for the stock? What is the closing change in the price of the stock, both in dollar and percentage terms? What is the stock’s 52-week price range? Now check out some of the links above the chart (such as Conversations, Statistics, Financials, and Holders, etc.) What kind of information listed there do you find interesting?