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The real risk-free rate, r*, is 3.0%. Two-year Treasury securities yield 6.5%. Three-year Treasury securities yield 7.0%. The Treasury securities have a maturity risk premium

  1. The real risk-free rate, r*, is 3.0%. Two-year Treasury securities yield 6.5%. Three-year Treasury securities yield 7.0%. The Treasury securities have a maturity risk premium = 0.1%(t - 1), where t = the maturity of the security. Assume that the default risk premium and liquidity premium on all Treasury securities equals zero. The expected rate of inflation for this next year (Year 1) is 3.25%. What does the market anticipate will be the rate of inflation three years from now?

  2. A 5-year corporate bond has an 8.0% yield. A 10-year corporate bond has a 9.0% yield. The two bonds have the same default risk premium and liquidity premium. The real risk-free rate, r*, is expected to remain constant at 3.0%. Inflation is expected to be 3.0% a year for the next five years. After five years, inflation is expected to be constant at some rate, X, which may or may not be 3.0%. The maturity risk premium equals 0.1(t - 1)%, where t equals time until the bonds maturity. In other words, the maturity risk premium on the five-year bond is 0.4%. What is the markets expectation today of the average level of inflation for Years 6 - 10, i.e., what is X?

  3. The forecasted cash flows in the next five years are given in the table. After year 5, a company will approach a constant growth rate at 3.0%. Today, the company has $31 Million of long-term debt (at book value), equity value of $50 Million (at book value), and $12 Million of marketable securities. The cost of capital is 10.0%. Find intrinsic value per share of the company. Assume the firm has 1.5 Million of equity shares outstanding. For final answer, put TWO digits after decimal.

    • Calculate Corporate Value

    • Calculate Equity Value

    • Calculate Intrinsic value per share

    • Calculate MVA (Market Value Added) of the firm

    • image text in transcribed

Year 1 2 FCF ($) $2,000,000 $4,000,000 $5,500,000 $7,600,000 $10,000,000 3 4 5 Year 1 2 FCF ($) $2,000,000 $4,000,000 $5,500,000 $7,600,000 $10,000,000 3 4 5

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