1. Rangoon Corp\'s sales last year were $400,000, and itsyear-end total assets w

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1. Rangoon Corp's sales last year were $400,000, and itsyear-end total assets were $300,000.  The averagefirm in the industry has a total assets turnover ratio (TATO) of2.5. The new CFO believes the firm has excess assets that canbe sold so as to bring the TATO down to the industry averagewithout affecting sales. By how much must the assets bereduced to bring the TATO to the industry average?        $100,000
       $110,000
       $120,000
       $130,000
       $140,000 2. McGwire Company’s pension fund projects that most ofits employees will take advantage of an early retirement programthe company plans to offer in five years. Anticipating theneed to fund these pensions, the firm bought zero coupon U.S.Treasury Trust Certificates maturing in five years. Whenthese instruments were originally issued, they were 12% coupon,30-year U.S. Treasury bonds. The stripped Treasuries arecurrently priced to yield 10%. Their total maturity value is$6,000,000. What is their total cost (price) to McGwire today?        553,776
       $5,142,600
       $3,404,561
       $4,042,040
       $3,725,528 3. Keys Corporation's 5-year bonds yield 6.50%, and 5-yearT-bonds yield 4.40%. The real risk-free rate is r* = 2.5%, the default risk premium for Keys' bonds is DRP = 0.40%, theliquidity premium on Keys' bonds is LP = 1.7% versus zero onT-bonds, and the inflation premium (IP) is 1.5%. What is thematurity risk premium (MRP) on a 5-year bond? (Points: 4)
       0.20%
       0.30%
       0.40%
       0.50%
       0.60% 1. Rangoon Corp's sales last year were $400,000, and itsyear-end total assets were $300,000.  The averagefirm in the industry has a total assets turnover ratio (TATO) of2.5. The new CFO believes the firm has excess assets that canbe sold so as to bring the TATO down to the industry averagewithout affecting sales. By how much must the assets bereduced to bring the TATO to the industry average?        $100,000
       $110,000
       $120,000
       $130,000
       $140,000        $100,000
       $110,000
       $120,000
       $130,000
       $140,000 2. McGwire Company’s pension fund projects that most ofits employees will take advantage of an early retirement programthe company plans to offer in five years. Anticipating theneed to fund these pensions, the firm bought zero coupon U.S.Treasury Trust Certificates maturing in five years. Whenthese instruments were originally issued, they were 12% coupon,30-year U.S. Treasury bonds. The stripped Treasuries arecurrently priced to yield 10%. Their total maturity value is$6,000,000. What is their total cost (price) to McGwire today?        553,776
       $5,142,600
       $3,404,561
       $4,042,040
       $3,725,528        553,776
       $5,142,600
       $3,404,561
       $4,042,040
       $3,725,528 3. Keys Corporation's 5-year bonds yield 6.50%, and 5-yearT-bonds yield 4.40%. The real risk-free rate is r* = 2.5%, the default risk premium for Keys' bonds is DRP = 0.40%, theliquidity premium on Keys' bonds is LP = 1.7% versus zero onT-bonds, and the inflation premium (IP) is 1.5%. What is thematurity risk premium (MRP) on a 5-year bond? (Points: 4)
       0.20%
       0.30%
       0.40%
       0.50%
       0.60%

Explanation / Answer

K        =          requiredreturn (or) yield on debt security

K*       =          realrisk-free rate of interest

IP       =          Inflationpremium

DRP   =          defaultrisk premium

LP      =          liquiditypremium

MRP   =          maturityrisk premium

Formula:        K =K*+IP+DRP+LP+MRP

r* (real risk-free rate) = 2.5%

Default Risk Premium (DRP) = 0.40%

LiquidityPremium (LP)         =1.7%

Inflation Premium(IP)           = 1.5%

6.50% = 2.5% + 1.5% + 0.40% +1.7% + MRP

6.50% = 6.1% + MRP

MRP = 6.50% - 6.1%

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