1. If a firms ROE is low and management wants to improve it, explain how using more debt might help.

2. Baker Brothers has a DSO of 40 days, and its annual sales are $7,300,000. What is its accounts receivable balance? Assume that it uses a 365-day year.

3. Bartley Barstools has a market/book ratio equal to 1. Its stock price is $14 per share and it has 5 million shares outstanding. The firms total capital is $125 million and it finances with only debt and common equity. What is its debt-to-capital ratio?

4. You read in The Wall Street Journal that 30-day T-bills are currently yielding 5.5%. Your brother-in-law, a broker at Safe and Sound Securities, has given you the following estimates of current interest rate premiums: Inflation premium= 3.25% Liquidity premium = 0.6% Maturity risk premium = 1.8% Default risk premium = 2.15% Intermediate Problems 816 On the basis of these data, what is the real risk-free rate of return?

5. The real risk-free rate is 3%. Inflation is expected to be 2% this year and 4% during the next 2 years. Assume that the maturity risk premium is zero. What is the yield on 2-year Treasury securities? What is the yield on 3-year Treasury securities?