If the present value of an ordinary, 2-year annuity is $6,100 and interest rates
ID: 1176117 • Letter: I
Question
If the present value of an ordinary, 2-year annuity is $6,100 and interest rates are 8 percent, what's the present value of the same annuity due?
A 2-year Treasury security currently earns 6.25 percent. Over the next two years, the real interest rate is expected to be 3.16 percent per year and the inflation premium is expected to be 2.16 percent per year. What is the maturity risk premium on the 2-year Treasury security?
Zoe's Dog Toys, Inc. reported a debt to equity ratio of 1.40 times at the end of 2008. If the firm's total assets at year-end were $50.8 million, how much of their assets are financed with equity?
Explanation / Answer
1)present value = PVAD 8%,2* Amount
= 1.92593*6100
= $ 11748.17
2)yield on treasury security = Risk free rate +inflation premium+maturity risk premium
6.25= 3.16 + 2.16 +MRP
6.25-3.16 - 2.16 = MRP
MRP= .93%
3) Let equity be "X" ,debt = 1.4x
debt +equity = asset
1.4x +x = 50.8
2.4x = 50.8
x = 50.8 /2.4
= 21.17 million
equity = $ 21.17 million