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# Finance questions

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1. Suppose the following relationships for the Dawn Corporation:
Sales/total assets= 10x
Return on assets= 15%
Return on equity= 25%

What is the real risk free rate for 3-month if the inflation for 3 months is estimated as 4%?
What is Dawn's debt ratio?

2. Suppose the following data on yields from holds:
3-month T-Bill=5.0%
30-year T-Bond=6.5%
30-year AAA Corporate=7.3%
30-year Municipal=5.475%

What is the maturity risk premium on 30-year Treasury bonds? Assume the expected inflation for 3-month T-Bills and 30-year T-Bonds is the same.

What is the real risk free rate for 3-month if the inflation for 3 months is estimated as 4%?

What is the default risk premium on 30-year AAA corporate bonds? Assume there exist liquid markets for AAA corporate bonds.

3. To finish college, you need \$18,000 per year for 4 years, starting next year (that is, you will need to withdraw \$18,000 one year from today). A relative offers to pay the expense by depositing in a bank time deposit paying 5 percent interest a sum of money that is sufficient to provide the four payments of \$18,000 each. His deposit will be made today. How large must the deposit be?

#### Solution Preview

1. Debt ratio = Total Debt/Total Assets
ROE = ROA X Assets/Equity
25% = 15% X Assets/Equity
Assets/Equity = 25%/15% = 1.67
Equity/Assets = 1/1.67 = 0.6
Debt/Assets = 1- Equity/Assets = 1-0.6 = 0.4
Debt Ratio = 0.4

2. The difference in yields on ...

#### Solution Summary

The solution explains some finance questions relating to debt ratio, maturity risk premium and time value of money.

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