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Suppose the real risk-free rate is 2.50% and the future rate

Suppose the real risk-free rate is 2.50% and the future rate of inflation is expect… Show more Question 14 Suppose the real risk-free rate is 2.50% and the future rate of inflation is expected to be constant at 3.80%. What rate of return would you expect on a 5-year Treasury security, assuming the pure expectations theory is valid? Disregard cross-product terms, i.e., if averaging is required, use the arithmetic average. 6.30% 5.80% 7.25% 5.17% 7.18% Question 15 Following information applies to the following questions. The balance sheet and income statement shown below are for Koski Inc. Note that the firm has no amortization charges, it does not lease any assets, none of its debt must be retired during the next 5 years, and the notes payable will be rolled over. Balance Sheet (Millions of $) Balance Sheet (Millions of $) Balance Sheet (Millions of $) Balance Sheet (Millions of $) Balance Sheet (Millions of $) Assets Assets 2010 Cash and securities Cash and securities $1,290 Accounts receivable Accounts receivable 9,890 Inventories Inventories 13,760 Total current assets Total current assets $24,940 Net plant and equipment Net plant and equipment $18,060 Total assets Total assets $43,000 Liabilities and Equity Liabilities and Equity Accounts payable Accounts payable $8,170 Notes payable Notes payable 6,020 Accruals Accruals 4,730 Total current liabilities Total current liabilities $18,920 Long-term bonds Long-term bonds $8,815 Total debt Total debt $27,735 Common stock Common stock $5,805 Retained earnings Retained earnings 9,460 Total common equity Total common equity $15,265 Total liabilities and equity Total liabilities and equity Total liabilities and equity $43,000 Income Statement (Millions of $) Income Statement (Millions of $) Income Statement (Millions of $) Income Statement (Millions of $) 2010 Net sales Net sales $51,600 Operating costs except depreciation Operating costs except depreciation Operating costs except depreciation Operating costs except depreciation 48,246 Depreciation Depreciation 903 Earnings bef interest and taxes (EBIT) Earnings bef interest and taxes (EBIT) Earnings bef interest and taxes (EBIT) Earnings bef interest and taxes (EBIT) $2,451 Less interest Less interest 927 Earnings before taxes (EBT) Earnings before taxes (EBT) Earnings before taxes (EBT) $1,524 Taxes Taxes 533 Net income Net income $990 Other data: Other data: Shares outstanding (millions) Shares outstanding (millions) Shares outstanding (millions) 500.00 Common dividends (millions of $) Common dividends (millions of $) Common dividends (millions of $) $346.67 Int rate on notes payable & L-T bonds Int rate on notes payable & L-T bonds Int rate on notes payable & L-T bonds Int rate on notes payable & L-T bonds 6.25% Federal plus state income tax rate Federal plus state income tax rate Federal plus state income tax rate Federal plus state income tax rate 35% Year-end stock price Year-end stock price Year-end stock price $23.77 What is the firm’s BEP? 5.81% 5.59% 5.70% 6.44% 4.85% You just deposited $2,000 in a bank account that pays a 4.0% nominal interest rate, compounded quarterly. If you also add another $5,000 to the account one year (4 quarters) from now and another $7,500 to the account two years (8 quarters) from now, how much will be in the account three years (12 quarters) from now? • Show less

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