1. The maturity premium compensates the lender for:
a. the amount of time the borrower will be holding the lender's money.
b. the difficulty incurred by the lender in turning his receivable into cash.
c. the restrictions on the lender's ability to recall the loan and force the borrower to pay the debt.
d. the likelihood of having to sell the IOU at a discoun tin order to get his cash back early.
2. A company is considering Projects S and L, whose cash flows are shown below. These projects are mutually exclusive, equally risky, and not repeatable. The CEO believes the IRR is the best selection criterion, while the CFO advocates the MIRR. If the decision is made by choosing the project with the higher IRR rather than the one with the higher MIRR, how much, if any, value will be forgone. In other words, what's the NPV of the chosen project versus the maximum possible NPV? Note that (1) "true value" is measured by NPV, and (2) under some conditions the choice of IRR vs. MIRR will have no effect on the value lost.
WACC = 9.00%
Year 0 1 2 3 4
CFS −$1,100 $550 $600 $100 $100
CFL −$2,750 $725 $725 $800 $1,400
a. 0
b. 79.56
c. 78.01
d. 73.38
e. 95.55