Posted: September 16th, 2017

Suppose 1-year T-bills currently yield 7.00% and the future inflation rate is expected to be constant at 3.20% per year. What is the real risk-free rate of return?

– Suppose 1-year T-bills currently yield 7.00% and the future inflation rate is expected to be constant at 3.20% per year. What is the real risk-free rate of return?
2- Kelly Inc’s 5-year bonds yield 7.50% and 5-year T-bonds yield 4.90%. The real risk-free rate is r* = 2.5%, the default risk premium for Kelly’s bonds is DRP = 0.40%, the liquidity premium on Kelly’s bonds is LP = 2.2% versus zero on T-bonds, and the inflation premium (IP) is 1.5%. What is the maturity risk premium (MRP) on all 5-year bonds?
3- Sadik Inc.’s bonds currently sell for $1,270 and have a par value of $1,000.  They pay a $105 annual coupon and have a 15-year maturity, but they can be called in 5 years at $1,100.  What is their yield to call (YTC)?
4- Why does retained earnings have an opportunity cost? Shouldn’t these be cost free funds for the firm to invest? Explain.
5- Most companies use “target” percentages for debt, common equity and preferred equity in their capital structure.  Should a WACC calculated using these target weights be used, or a WACC calculated using the weights for the actual sources of captial for the specific project be used?