1. Which of the following is true? a. The Treasury yield curve is always inverte

Question

1. Which of the following is true?

a. The Treasury yield curve is always inverted

b. The Treasury yield curve was inverted in the early 1980s

c. The Treasury yield curve usually slopes down in the short term and up in the long term

2. What is the inflation premium for a 3 year bond if inflation is expected to be 3% for the first year, 4% for the 2nd, 3rd and 4th year and then 5% thereafter?

a. 6.0%

b. 4.0%

c. 3.7%

3. KTS corporation currently pays a dividend of $1 per share. KTS is expected to grow at 10% for the next 2 years then KTS will grow at a constant rate of 5% per year. What will be the dividend for KTS in 3 years?

a. $1.27

b. $6.62

c. $1.1

4. FDW uses 30% debt and 70% equity to finance new capital expenditures. The cost of debt is 6%. The average tax rate is 30%. The marginal tax rate is 40%. The cost of retained earnings is 12%. What is the WACC?

a. 17.85%

b. 8.36%

c. 9.48%

Explanation / Answer

b. The Treasury yield curve was inverted in the early 1980s

inflation premium = (1.03*1.04*1.05)^1/3 - 1 = 4.0%...b.

dividend in 3 years = 1*1.1*1.1*1.05 = 1.27

WACC = 0.30*6%*0.60 + 0.70*12% = 9.48%

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