# Finance questions

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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#### 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.