19. Robert's Inc recently reported the following information: Net Income = $1,200,000 Tax rate = 40% Interest Expense = $400,000 Total Invested Operating Capital Employed = $18,000,000 After-tax cost of capital = 10% What is the company's EVA? Correct Answer: $0.6 Million How to obtain the correct answer: EVA = (NOPAT: Net Operating Profit After Tax) - ( ACC: Annual Dollar Cost of Capital) \" = $1,200,000 = X (1-.40) \" = \" = X (0.60) \" = Divide both sides by 0.60 \" = $2,000,000 = EBIT - Interest: EBIT= $2,000,000 + $400,000=$2,400,000 =EBIT (1-t) = $2,400,000 (1-0.40) = $1,440,000 Million = Cost of Capital = $18,000,000 Million (0.10) = $1,800,000 Million EVA = $2.4 Million (-) $1.8 Million = $0.6 Million. CORRECT ANSWER IS -$360,000 Question 2: One-year Treasury securities yield 2%, 2-year Treasury securities yield 2.2%, and three-year Treasury securities yield 3%. Assume that the expectation theory holds. What does the market expect will be the yield on a 1-year Treasury Securities two years from now? The correct answer is: 2.23% How to obtain the correct answer: X2 = the yield on a one-year security from now. = (1+0.03)3= (1+0.022)2 (1+x)1 = (1.092727) = (1.04884) (1+x)1 = divide both sides by 1.04884 = 1.046188 = (1+x)1 = 1.046188 = (1+x) = 1.02283 = 1+x = 0.02283= x X= 2.23% CORRECT ANSWER IS: r= 4.62% Question 3: Suppose 1-year T-bills currently yield 7.00% and the future inflation is expected to be constant at 3.20% per year. What is the real risk-free rate of return, r*? The crossproduct term should be considered, i.e., if averaging is required, use the geometric average. The correct answer is: 3.88% How to obtain the correct answer: (1+0.07) = (1+X) (1+0.032) X = 3.88% The CORRECT ANSWER IS= 3.68%