inance sample quiz questions: return on total assets,

external funding, modified internal rate of return,

estimated weighted average cost of capital and more...
Multiple Choice
Identify the letter of the choice that best completes the statement or answers the
question.
____ 1. You are given the following data:
r* = real risk-free rate = 4%
Constant inflation premium = 7%
Maturity risk premium = 1%
Default risk premium for AAA bonds = 3%
Liquidity premium for long-term T-bonds = 2%
Assume that a highly liquid market does not exist for long-term T-bonds, and the
expected rate of inflation is a constant. Given these conditions, the nominal risk-free
rate for T-bills is __________, and the rate on long-term Treasury bonds is
__________.
a. 4%; 14%
b. 4%; 15%
c. 11%; 14%
d. 11%; 15%
e. 11%; 17%
____ 2. The real risk-free rate is expected to remain at 3 percent. Inflation is expected
to be 3 percent this year, and 4 percent next year. The maturity risk premium is
estimated to be equal to 0.1%(t - 1), where t = the maturity of a bond (in years). All
Treasury securities are highly liquid, and therefore have no liquidity premium. Three-
year Treasury bonds yield 0.5 percentage points (0.005) more than two-year Treasury
bonds (that is, two-year bond yield plus 0.5%). What is the expected level of inflation in
Year 3?
a. 4.5%
b. 4.7%
c. 5.0%