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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?

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    https://brainmass.com/business/finance/debt-ratio-maturity-risk-premium-time-value-money-291533

    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.

    $2.19

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