1. Construct a pro forma income statement for the first year and second year for the following assum

1. Construct a pro forma income statement for the first year and second year for the following assumptions:

· Units of Sales in Year 1: 100,000

· Price per Unit: $10

· Variable cost per unit: 30%

· Fixed Costs: $120,000

· Income taxes: 15%

· Interest Expense: $200,000

· In year 2, Price per unit increases to $11.50, and unit of sales increases by 3%, all other assumptions remain the same.

2. Calculate the sustainable growth based on the following information:

· D= 30%

· ROE = 25%

3. Calculate a table of interest rates for 5 years based on the following information:

Note: When calculating the 'adjusted inflation' rates please use the method as outlined in the text.

· The pure interest rate is 2%

· Inflation expectations for year 1 = 3%, year 2 =4%, years 3-5 =5%

· The default risk is .1% for year one and increases by .1% over each year

· Liquidity premium is 0 for year 1 and increases by .2% each year

· Maturity risk premium is 0 for years 1 and 2 and .3% for years 3-5

4. Explain the importance of interest rates, and how risk is considered to businesses and economic activity. (300 Words)