Financial Management

1. Explain the importance of interest rates, and how risk is considered to businesses and economic activity. Your response should be at least 250 words in length.

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