Value of Money

Question 1

1. Liddy Products, Inc. just issued 10-year, 8% coupon bonds at par. Outstanding Limbaugh Corp. bonds, which have a maturity of 10 years, sell at a premium and are viewed by investors as having the same risk as the Liddy bonds. Therefore, it must be true that:

1. The coupon rate on the Limbaugh bonds is equal to that on the Liddy bonds.

2. The coupon rate on the Limbaugh bonds is higher than that on the Liddy bonds.

3. The coupon payment on the Limbaugh bonds is lower than that on the Liddy bonds.

4. The yield on Limbaugh bonds is higher than the yield on Liddy bonds.

2. The internal rate of return (IRR) and the profitability index (PI) should not be used to evaluate capital budgeting projects because:

1. 1. 1. Neither method considers all cash flows.

      2. Both methods fail to take into account scale of projects.

      3. Under certain circumstances, there may be multiple IRRs and PIs.

      4. Both methods ignore the time value of money

Question 2