Question 14

1. Suppose the real risk-free rate is 2.50% and the future rate of inflation is expected to be constant at 3.80%. What rate of return would you expect on a 5-year Treasury security, assuming the pure expectations theory is valid? Disregard cross-product terms, i.e., if averaging is required, use the arithmetic average.

   		6.30%
   		5.80%
   		7.25%
   		5.17%
   		7.18%

   Question 15

   1. Following information applies to the following questions. The balance sheet and income statement shown below are for Koski Inc. Note that the firm has no amortization charges, it does not lease any assets, none of its debt must be retired during the next 5 years, and the notes payable will be rolled over.

      Balance Sheet (Millions of $)
      Assets				2010
      Cash and securities				$1,290
      Accounts receivable				9,890
      Inventories				13,760
      Total current assets				$24,940
      Net plant and equipment				$18,060
      Total assets				$43,000
      Liabilities and Equity
      Accounts payable				$8,170
      Notes payable				6,020
      Accruals				4,730
      Total current liabilities				$18,920
      Long-term bonds				$8,815
      Total debt				$27,735
      Common stock				$5,805
      Retained earnings				9,460
      Total common equity				$15,265
      Total liabilities and equity				$43,000
      Income Statement (Millions of $)				2010
      Net sales				$51,600
      Operating costs except depreciation				48,246
      Depreciation				903
      Earnings bef interest and taxes (EBIT)				$2,451
      Less interest				927
      Earnings before taxes (EBT)				$1,524
      Taxes				533
      Net income				$990
      Other data:
      Shares outstanding (millions)				500.00
      Common dividends (millions of $)				$346.67
      Int rate on notes payable & L-T bonds				6.25%
      Federal plus state income tax rate				35%
      Year-end stock price				$23.77

      What is the firm's BEP?

      		5.81%
      		5.59%
      		5.70%
      		6.44%
      		4.85%

      You just deposited $2,000 in a bank account that pays a 4.0% nominal interest rate, compounded quarterly. If you also add another $5,000 to the account one year (4 quarters) from now and another $7,500 to the account two years (8 quarters) from now, how much will be in the account three years (12 quarters) from now?