Question 5 (12 marks):

1. What expectations of future interest rates does an upward sloping yield curve indicate? Discuss under the expectation hypothesis and the liquidity preference theory of term structure, respectively. (4 marks)

2. You are the CEO of an automobile company. You forecast that the economy is sliding into a recession. How can you adjust the companys operating leverage and financial leverage to minimize the adverse effect of the recession on your company? Please explain the reasons. (3 marks)

3. In what circumstances is it most important to use multistage dividend discount models rather than constant-growth models? And in what circumstances is it most important to use constant growth model rather than multistage dividend discount models? (5 marks)