1. Explain the importance of interest rates, and how risk is considered to businesses and economic activity.
2. Construct a pro forma income statement for the first year and second year for the following assumptions:
Units of Sales in Year 1: 110,000
Price per Unit: $11
Variable cost per unit: 30%
Fixed Costs: $125,000
Income taxes: 15%
Interest Expense: $200,000
In year 2, Price per unit increases to $11.50, and unit of sales increases by 5%, all other assumptions remain the same.
3. Calculate the sustainable growth based on the following information:
D= 30%
ROE = 25%
4. Calculate a table of interest rates based on the following information:
a. The pure interest rate is 1.6%
b. Inflation expectations for year 1 = 3%, year 2 =3.5%, years 3-5 =5%
c. The default risk is .1% for year one and increases by .2% over each year
d. Liquidity premium is 0 for year 1 and increases by .2% each year
e. Maturity risk premium is 0 for years 1 and 2 and .2% for years 3-5
