1. What are some actions that stockholders can take to ensure that managements and stockholders interests are aligned? Useful motivational tools that will aid in aligning stockholders and managements interests include: (1) reasonable compensation packages, (2) direct intervention by shareholders, including firing managers who dont perform well, and (3) the threat of takeover. 2. Bond X is a premium bond making semiannual payments. The bond pays a coupon rate of 6.8 percent, has a YTM of 6.2 percent, and has 13 years to maturity. Bond Y is a discount bond making semiannual payments. This bond pays a coupon rate of 6.2 percent, has a YTM of 6.8 percent, and also has 13 years to maturity. The bonds have a par value of $1,000. Required what is the price of each bond today? If interest rates remain unchanged, what do you expect the price of these bonds to be 1 year from now? In 3 years? In 8 years? In 12 years? In 13 years? Whats going on here? Illustrate your answers by graphing bond prices versus time to maturity. 3. Most corporations pay quarterly dividends on their common stock rather than annual dividends. Barring any unusual circumstances during the year, the board raises, lowers, or maintains the current dividend once a year and then pays this dividend out in equal quarterly installments to its shareholders. Required (a) Suppose a company currently pays an annual dividend of $3.60 on its common stock in a single annual installment, and management plans on raising this dividend by 3.4 percent per year indefinitely. If the required return on this stock is 10.5 percent, what is the current share price? (b) Now suppose the company in (a) actually pays its annual dividend in equal quarterly installments; thus, the company has just paid a dividend of $.90 per share, as it has for the previous three quarters. What is your value for the current share price now? (Hint: Find the equivalent annual end-of-year dividend for each year.) Comment on whether you think this model of stock valuation is appropriate