1. What are convertible securities?
A. Convertible securities are bonds or preferred stock that allow the owner to convert them into cash within 90 days of purchase.
B. Convertible securities are bonds or preferred stock that automatically convert into common stock after 90 days of purchase.
C. Convertible securities are bonds or preferred stock that allow the owner to convert them into common stock.
D. Convertible securities are bonds or preferred stock that managers negotiate as part of their compensation package.
2. A firm utilizes a strategy of capital rationing, which is currently $375,000 and is considering the following two projects: Project A has a cost of $335,000 and the following cash flows: year 1 $140,000; year 2 $150,000; and year 3 $100,000. Project B has a cost of $365,000 and the following cash flows: year 1 $220,000; year 2 $110,000; and year 3 $150,000. Using a 6% cost of capital, what is the net present value of project A?
A. $25,930
B. $14,520
C. $11,589
D. $19,230