Commonly used proxy for the risk-free rate

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Reference no: EM132054125

1. Grandma's Applesauce, Inc. has a 0.60 probability of a good year with operating cash flow of $50,000; and 0.40 probability of a bad year with operating cash flow of $30,000. The company has a debt of $35,000 with 8 percent interest due next year. Assuming the company has no means of servicing its debt other than operations, and a 0% tax rate, which of the following is true?

A Shareholders expected claim is $12,200

B Creditors expected claim is $37,800

C Creditors expected claim is $34,680

D None of the above

2. A firm is all equity financed, with 10,000 outstanding shares with a market value of $20 each. Its net income was $30,000, and it decides to pay a cash dividend of $2,000. Calculate the value of each share after the dividend payout.

A $22.8

B $20.0

C $19.8

D Not enough information

3. Which is a commonly used proxy for the "risk-free rate"?

A The average historical interest rate on long-term government bonds

B The current market rate interest rate on a government-insured savings account

C The current yield to maturity on a long-term government bond

D The rate of return on a low volatility stock

Reference no: EM132054125

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