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Suppose you are considering two possible investment opportunities; a 12-year Treasury bond and a 7-year, A-rated corporate bond. The current real risk-free rate is 4%; and inflation is expected to be 2% for the next 2 years, 3% for the following 4 years, and 4% thereafter. The maturity risk premium is estimated by this formula: MRP= 0.02(t-1)%. The liquidity premium (LP) for the corporate bond is estimated to be 0.3%. You may determine the default risk premium (DRP), given the company's bond rating, from the table :
U.S. Treasury (rate) 1.81% (CBYS=DRP+LP) -AAA corporate (rate) 2.00 (CBYS=DRP+LP) 0.19% AA corporate (rate) 2.68 (CBYS=DRP+LP) 0.87A corporate (rate) 2.79 (CBYS=DRP+LP) 0.98
Remeber to subtract the bond's LP from the corporate spread given in the table to arrive at the bond's DRP. What yield would you predict for ech of these two investments?
A small business owner holds $4,000 in cash; $1,200 in materials; $10,000 in land and $32,000 in plant and equipment. His accounts payable total $9,000 and he has an outstanding bank loan totaling $18,800. what is the owners equity?
Are there any other regulatory controls or mechanisms (other than internal controls) that could prevent management fraud in Australia? If so, briefly discuss the ability of these mechanisms to prevent fraud?
Prepare the journal entries necessary to record the transactions above using the appropriate dates. Prepare the adjusting entries necessary at Dec. 31, 2007 in order to properly report interest expense related to the above transactions. Assume stra..
Prepare the journal entry for Sorter Company to write off the Ordonez receivable. When writing the journal entry use Dr. for debit and Cr. for credit.
In November 2006 after having incorporated Cookie Creations Inc., Natalie begins operations. She has decided to not pursue the offer to supply cookies to Biscuits. Instead she will focus on offering cooking classes. The following events occur. Pre..
What is the forward price of your contract? Suppose both the 1-year and 11-year spot rates unexpectedly shift downward by 2 percent. What is the price of a forward contract otherwise identical to yours?
During the last month of 2011, the first month of the offer, Funzy sold 12 million boxes of wheatos and 2.4 million of the coupons were redeemed. What amount should Funzy report as a promotional expense for coupons on its December 31, 2011, income..
The committee which is responsible for holding hearings on tax legislation for the House of Representatives is the
Tim is a Senor audit of Two Be Gone, a large publicly held company. The company recently completed an acquisition of its fifth largest competitor. What risks might this present? How will you, the auditor, respond to these risks (i.e. what actions ..
The following information is given for Alpha and Beta Divisions of Fraternity Corporation. If Fraternity Corporation uses ROI to evaluate division managers, and uses historical cost as the investment base, compute the ROI for Alpha and Beta.
Prepare the entry to record the weekly payroll and the costs and liabilities related to the bonus and the vacation pay, assuming that Vance is the only employee
The heating division of ITA International produces a heating element that it sells to its customers for $42 per unit. Its variable cost per unit is $19, and its fixed cost per unit is $10. What is the minimum transfer price that the heating divisio..
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