1. The corporate treasurer of Sid’s Flowers, Inc.

is considering the purchase of either a municipal

obligation with a 6.6% coupon or an offering carrying a 10% coupon. Both bonds have a $1,000
par value. The company is currently in the 34% marginal tax bracket. Which security should the
treasurer recommend?

2. Eskimo Mining expects to have credit sales of $5 million this year. First National Bank is
offering Eskimo Mining a lock box system for $1,000 per month. Eskimo Mining estimates that
the new lock box system will reduce float by five days. What rate of return must Eskimo Mining
earn on its marketable securities to make it worthwhile for the company to institute this lock box
system? Use a 365-day year.

3. Colonial Services has received a proposal from Tidewater Bankshares to establish a lock box
system to accelerate the receipt of $500 million annually on one million checks. By its own
analysis, Petro believes such a system would decrease total float by two days. If Petro can earn
12% before taxes on the released funds, what is the maximum that Colonial should be willing to
pay the bank per check for the service? Use a 365-day year.