Suppose 2-year Treasury bonds yield 5.3%, while 1-year bonds yield 3.6%. r* is 1%, and the maturity risk premium is zero. Negative expected inflation rates, if any, should be indicated by a minus sign.

1. Using the expectations theory, what is the yield on a 1-year bond, 1 year from now? Calculate the yield using a geometric average. Do not round intermediate calculations. Round your answer to two decimal places.

b. What is the expected inflation rate in Year 1? Do not round intermediate calculations. Round your answer to two decimal places

What is the expected inflation rate in Year 2? Do not round intermediate calculations. Round your answer to two decimal places.

1. Compare 30-year bond to a 5-year bond all else equal. Which one is more sensitive to interest rate changes. Why? Please explain.

2. AAA, Inc. currently has an issue of bonds outstanding that will mature in 31 years. The bonds have a face value of $1,000 and a stated annual coupon rate of 20.0% with annual coupon payments. The bond is currently selling for $890. The bonds may be called in 4 years for 120.0% of the par value ($1200). What is your expected quoted annual rate of return if you buy the bonds and hold them until maturity?

3. BBB, Inc. bonds have a par value of $1,000, a 33-year maturity, and an annual coupon rate of 12.0% with annual coupon payments. The bonds are currently selling for $923. The bonds may be called in 4 years for 112.0% of par ($1120). What quoted annual rate of return do you expect to earn if you buy the bonds and company calls them when possible?

Quantitative Problem 2: Hadley Inc. forecasts the year-end free cash flows (in millions) shown below.

The weighted average cost of capital is 9%, FCFs are expected to continue growing at a 4% rate after Year 5. The firm has $26 million of market-value debt, but it has no preferred stock or any other outstanding claims. There are 18 million shares outstanding. What is the value of the stock price today (Year 0)?

Treasury is: Spot 1-year Treasury is 4% Spot 2-year treasury is 4.5%

B Corporate Debt interest annually Spot 1 year 8.5%, Spot 2 years 9.5%

Forward 1 Year maturity

Let’s call the Treasury x

The Corporate debt is called y

1. What is the value of x the forward rate on one-year maturity Treasuries delivered in one year?
2. What is the value of y the forward rate on one-year maturity B corporate debt delivered in one year?
3. Exercising the term structure of default probabilities, the implied default probability for B corporate debt during the current year is?
4. Exercising the term structure of default probabilities, the implied default probability for B corporate debt during the second year is what?

•Burnout Batteries

•Initial Cost = $36 each

•3-year life

•$100 per year to keep charged

•Expected salvage = $5

•Straight-line depreciation

•Long-lasting Batteries

•Initial Cost = $60 each

•5-year life

•$88 per year to keep charged

•Expected salvage = $5

•Straight-line depreciation

The machine chosen will be replaced indefinitely and neither machine will have a differential impact on revenue. No change in NWC is required.

The required return is 15%, and the tax rate is 34%.

Which battery should be chosen?

Maria is a 21-year-old single mother. On the way to work, she drops off her 3-year-old daughter at a community day care center and picks her up on the way home. Because her income is low, Maria works at a second job from home in the evening and rarely goes out for social interaction. For the last several days, her daughter has been sick with influenza, so Maria has stayed awake throughout the night to care for her. One morning, while preparing her daughter’s breakfast, Maria realized that they had run out of milk and bread again. Maria sat down on the floor and began to cry

1. One of the effects of chronic stress is an impaired immune response. What are the physiologic mechanisms that will make Maria particularly prone to contracting her daughter’s illness?
2. Assuming the stressors are the same, how is it that someone might react differently than Maria? From what you know of her history, what are some factors affecting Maria’s ability to cope both physically and psychologically?
3. What are the signs and symptoms that would distinguish a person with posttraumatic stress disorder from an individual like Maria?

Year 1 Year 2

Revenues 128.9 151.6

COGS and Operating Expenses (other than depreciation) 49.6 52.7

Depreciation 24.9 43.5

Increase in Net Working Capital 3.4 8.1

Capital Expenditures 27.3 43.2

Marginal Corporate Tax Rate 35% 35%

a. What are the incremental earnings for this project for years 1 and​ 2?​ (Note: Assume any incremental cost of goods sold is included as part of operating​ expenses.)

b. What are the free cash flows for this project for years 1 and​ 2?

Problem 11-6

A four-year project has cash flows before taxes and depreciation of $12,000 per year. The project requires the purchase of a $50,000 asset that will be depreciated over five years straight-line. At the end of the fourth year the asset will be sold for $15,000. The firm's marginal tax rate is 33%. Calculate the cash flows associated with the project. (For convenience assume the gain on the sale of the asset is taxed at 33%.) Use a minus sign to indicate negative cash flows or decreases in cash, if required.