1. Suppose the real rate of interest is estimated to be 3%. A Treasury bond has a nominal rate of 5%. What is the inflation rate premium on this bond? Set your calculator to 4 decimal places and round to 2 decimal places at the end. Use the formula (not the approximation).

a. 2.94% b. 2.00% c. 1.25% d. 8.00% e. 1.94%

2. If the real rate of interest is 2% and the inflation rate premium on a Treasury bond is 4%, what should be the nominal rate of interest for the bond? Set your calculator to 4 decimal places and round to 2 decimal places at the end. Use the formula (not the approximation).

a. 9.8% b. 6.08% c. 8.00% d. 1.96% e. 7.12%

3. Colonial Corporation had an operating loss of $11 million in 2017, their first year in business. They earned $3 million in taxable income in 2018, 2019, 2020 and 2021. Calculate the firm's tax liability for 2021.

a. $0 b. $630,000 c. $420,000 d. $210,000 e. $790,000

4. Dr. Bob's Medical Products had sales of $95 million last year. Their costs of goods sold amounted to $54 million and operating expenses totaled $20 million. Dr. Bob's received $1 million in dividend income. They sold land for $10 million that they had purchased for $8 million a few years ago. Dr. Bob's has a $50 million bond issue outstanding that has a 6% interest rate. Part of this money was used to purchase $40 million in equipment which is depreciable for 10 years using simplified straight-line depreciation. What is Dr. Bob's tax liability for last year?

a. $3,780,000 b. $4,200,000 c. $3,360,000 d. $3,465,000 e. $2,415,000

5. Giant Microsystems, Inc. had sales of $25 million last year. They had operating expenses of $4.6 million and received $400,000 in dividend income. The firm's costs of goods sold amounted to $14 million. They have a $4 million bond issue outstanding with a 6% interest rate. They purchased $6 million in equipment which is depreciable for 10 years using simplified straight-line depreciation. The firm sold shares of IBM stock for $150,000 that they bought several years ago for $100,000. They also sold an old building for $900,000 that was worth $1 million on their balance sheet. Calculate the firm's tax liability.

a. $1,293,600 b. $1,344,000 c. $1,220,100 d. $1,209,600 e. $999,600