1. Cambridge, Inc. is a large public company that operates throughout the world. It uses a centralized approach and makes most of the decisions for its many subsidiaries. Bridgeston is also a large public company that operates throughout the world. It uses a decentralized approach and its subsidiaries make most of their own decisions. Which of the following is correct?
a. Agency costs would be the same for both companies
b. Agency problems would probably be less pronounced for Cambridge because it is less likely that subsidiary decisions would conflict with the parent
c. Agency problems would probably be less pronounced for Bridgeston because it is likely that subsidiary decision would conflict with the parent
d. Agency problems would be the same for both companies
e. None of the above
2. Which of the following statements regarding convertible is correct?
a. The coupon interest rate on a firm's convertibles is generally set higher than the market yield on its otherwise similar straight debt.
b. For equilibrium to exit, the expected return on a convertible bond must normally be between the expected return on the firm's otherwise similar straight debt and the expected return on its common stock.
c. Investors are willing to accept a lower rate on a convertible than on otherwise similar straight debt because convertible are less risky than straight debt.
d. One advantage of convertibles over warrants is that the issuer receives additional cash money when convertibles are converted.
e. None of the above.