Question 1. As the director of capital budgeting for Denver Corporation, you are evaluating two mutually exclusive projects with the following net cash flows:
Cash Flows
A B
-$100,000 -$125,000
1 $25,000 $25,000
2 $30,000 $35,000
3 $30,000 $35,000
4 $25,000 $35,000
5 $30,000 $45,000
If Denver's cost of capital is 15 percent, defend which project would you choose.
Question 2. Chadmark Corporation's budgeted monthly sales are $3,000. Forty percent of its customers pay in the first month and take the 2 percent discount. The remaining 60 percent pay in the month following the sale and don't receive a discount. Chadmark's bad debts are very small and are excluded from this analysis. Purchases for next month's sales are constant each month at $1,500. Other payments for wages, rent, and taxes are constant at $700 per month. Construct a single month's cash budget with the information given. What is the average cash gain or (loss) during a typical month for Chadmark Corporation?
Question 3. Which of the following bank accounts has the highest effective return and why?
A. An account which pays 10% nominal interest with monthly com-pounding.
B. An account which pays 10% nominal interest with daily com-pounding.
C. An account which pays 10% nominal interest with annual com-pounding.
D. An account which pays 9% nominal interest with daily com-pounding.
E. All of the investments above have the same effective annual return
Question 4. Which of the following statements is most correct and why?
A. If a bond sells for less than par, then its yield to maturity is less than its coupon rate.
B. If a bond sells at par, then its current yield will be less than its yield to maturity.
C. Assuming that both bonds are held to maturity and are of equal risk, a bond selling for more than par with ten years to maturity will have a lower current yield and higher capital gain relative to a bond that sells at par.
D. Answers A and C are correct.
E. None of the answers above is correct.