A corporate bond has a nominal or observed yield of 9.8%. Your sister, the famous economist, has given you the following estimates: Inflation-risk premium = 3.00% Default-risk premium = 2.10% Maturity premium = 1.90% Liquidity premium = 0.50% On the basis of these data, what is the best estimate of the real risk-free rate of return?
1. A corporate bond has a nominal or observed yield of 9.8%. Your sister, the famous economist, has given you the following estimates:
Inflation-risk premium = 3.00%
Default-risk premium = 2.10%
Maturity premium = 1.90%
Liquidity premium = 0.50% On the basis of these data, what is the best estimate of the real risk-free
2.Black Lung Mining is considering opening a new coal mine. Black Lung’s beta is 0.8. Black Lung paid $15 million for the property six years ago. A recently completed feasibility study estimated that new machinery and equipment at the mine will cost $33 million, working capital requirements will increase by $500,000 immediately, and employee-training expenses will be $125,000. The feasibility study cost $1,000,000. What amount should Black Lung use as its initial outlay in the capital budgeting analysis?
3. Management expects a project to generate EBIT of $600,000 per year for 4 years. Depreciation expense is expected to be $225,000 per year and the corporation’s tax rate is 40%. The project will require an increase in net working capital of $50,000 in year one and allow a decrease in net working capital of $25,000 in year four. The capital expenditure for the project will occur in year zero. What is the
Nominal yield= real risk-free rate of return + Inflation-risk premium+ Default-risk premium+ Maturity premium +Liquidity premium
9.80% =real risk free rate of return + 3% +2.10% +1.90% +0.50%
9.80% = real risk free rate of return + 7.5%
real risk-free rate of return = 2.30%
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