Working Capital Policy-Example Problem

6. Procter Micro-Computers, Inc., requires $1,200,000 in financing over the next two years. The
firm can borrow the funds for two years at 9.5 percent interest per year. Mr. Procter decides
to do economic forecasting and determines that if he utilizes short-term financing instead,
he will pay 6.55 percent interest in the first year and 10.95 percent interest in the second
year. Determine the total two-year interest cost under each plan. Which plan is
less costly?

6-7. Solution:
Procter-Mini-Computers, Inc.
Cost of Two Year Fixed Cost Financing
$1,200,000 borrowed × 9.5% per annum × 2 years = $228,000 interest
Cost of Two Year Variable Short-term Financing
1st year $1,200,000 × 6.55% per annum = $ 78,600 interest cost
2nd year $1,200,000 × 10.95% per annum = $131,400 interest cost
$210,000 two-year total
The short-term plan is less costly.
8. Sauer Food Company has decided to buy a new computer system with an expected life of
three years. The cost is $150,000. The company can borrow $150,000 for three years at
10 percent annual interest or for one year at 8 percent annual interest.
How much would Sauer Food Company save in interest over the three-year life of the
computer system if the one-year loan is utilized and the loan is rolled over (reborrowed)
each year at the same 8 percent rate? Compare this to the 10 percent three-year loan. What
if interest rates on the 8 percent loan go up to 13 percent in year 2 and 18 percent in year 3?
What would be the total interest cost compared to the 10 percent, three-year loan?

6-8. Solution:
Sauer Food Company
If Rates Are Constant
$150,000 borrowed × 8% per annum × 3 years =
$36,000 interest cost
$150,000 borrowed × 10% per annum × 3 years =
$45,000 interest cost
$45,000 – $36,000 = $9,000 interest savings borrowing
short-term
If Short-term Rates Change
1st year $150,000 × .08 = $12,000
2nd year $150,000 × .13 = $19,500
3rd year $15,000 × .18 = $27,000
Total = $58,500
$58,500 – $45,000 = $13,500 extra interest costs
borrowing short-term.
9. Assume Stratton Health Clubs, Inc., has $3,000,000 in assets. If it goes with a low liquidity
plan for the assets, it can earn a return of 20 percent, but with a high liquidity plan, the
return will be 13 percent. If the firm goes with a short-term financing plan, the financing
costs on the $3,000,000 will be 10 percent, and with a long-term financing plan, the
financing costs on the $3,000,000 will be 12 percent. (Review Table 6-11 for parts a, b,
and c of this problem.)
a. Compute the anticipated return after financing costs with the most aggressive asset-
financing mix.
b. Compute the anticipated return after financing costs with the most conservative asset-
financing mix.
c. Compute the anticipated return after financing costs with the two moderate approaches
to the asset-financing mix.
d. Would you necessarily accept the plan with the highest return after financing costs?
Briefly explain.

6-9. Solution:
Stratton Health Clubs, Inc.
a. Most aggressive
Low liquidity/high return $3,000,000 × 20% = $600,000
Short-term financing –3,000,000 × 10% = –300,000
Anticipated return $300,000
b. Most conservative
High liquidity/low return $3,000,000 × 13% = $390,000
Long-term financing –3,000,000 × 12% = –360,000
Anticipated return $ 30,000
c. Moderate approach
Low liquidity $3,000,000 × 20% = $600,000
Long-term financing –3,000,000 × 12% = –360,000
$240,000
OR
High liquidity $3,000,000 × 13% = $390,000
Short-term financing –3,000,000 × 10% = –300,000
$ 90,000
6-9. (Continued)
d. You may not necessarily select the plan with the highest
return. You must also consider the risk inherent in the plan.
Of course, some firms are better able to take risks than
others. The ultimate concern must be for maximizing the
overall valuation of the firm through a judicious
consideration of risk-return options.
10. Assume that Atlas Sporting Goods, Inc., has $800,000 in assets. If it goes with a low-
liquidity plan for the assets, it can earn a return of 15 percent, but with a high-liquidity plan
the return will be 12 percent. If the firm goes with a short-term financing plan, the
financing costs on the $800,000 will be 8 percent, and with a long-term financing plan, the
financing costs on the $800,000 will be 10 percent. (Review Table 6-11 on page 173 for
parts a, b, and c of this problem.)
a. Compute the anticipated return after financing costs with the most aggressive asset-
financing mix.
b. Compute the anticipated return after financing costs with the most conservative asset-
financing mix.
c. Compute the anticipated return after financing costs with the two moderate approaches
to the asset-financing mix.
d. If the firm used the most aggressive asset-financing mix described in part a and had the
anticipated return you computed for part a, what would earnings per share be if the tax
rate on the anticipated return was 30 percent and there were 20,000 shares outstanding?
e. Now assume the most conservative asset-financing mix described in part b will be
utilized. The tax rate will be 30 percent. Also assume there will only be 5,000 shares
outstanding. What will earnings per share be? Would it be higher or lower than the
earnings per share computed for the most aggressive plan computed in part d?
6-10. Solution:
Atlas Sporting Goods, Inc.
a. Most aggressive
Low liquidity $800,000 × 15% = $120,000
Short-term financing 800,000 × 8% = –64,000
Anticipated return $ 56,000
b. Most conservative
High liquidity $800,000 × 12% = $ 96,000
Long-term financing 800,000 × 10% = –80,000
Anticipated return $ 16,000
c. Moderate approach
Low liquidity $800,000 × 15% = $120,000
Long-term financing 800,000 × 10% = –80,000
Anticipated return $ 40,000
OR
High liquidity $800,000 × 12% = $ 96,000
Short-term financing 800,000 × 8% = –64,000
Anticipated return $ 32,000
d. Anticipated return $ 56,000
– taxes (30%) 16,800
Earnings after taxes 39,200
Shares 20,000
Earnings per share $1.96
e. Anticipated return $ 16,000
–taxes (30%) 4,800
Earnings after taxes 11,200
Shares 5,000
Earnings per share $2.24
It is higher ($2.24 vs. $1.96)
11. Colter Steel has $4,200,000 in assets.

Temporary current assets ......................... $1,000,000

Permanent current assets .......................... 2,000,000
Fixed assets .............................................. 1,200,000
Total assets ......................................... $4,200,000

Short-term rates are 8 percent. Long-term rates are 13 percent. Earnings before interest and
taxes are $996,000. The tax rate is 40 percent.
If long-term financing is perfectly matched (synchronized) with long-term asset needs,
and the same is true of short-term financing, what will earnings after taxes be? For a
graphical example of perfectly matched plans, see Figure 6-5.

6-11. Solution:
Colter Steel
Long-term financing equals:
Permanent current assets $2,000,000
Fixed assets 1,200,000
$3,200,000
Short-term financing equals:
Temporary current assets $1,000,000
Long-term interest expense = 13% × $3,200,000 = $ 416,000
Short-term interest expense = 8% × 1,000,000 = 80,000
Total interest expense $ 496,000
Earnings before interest and taxes $ 996,000
Interest expense 496,000
Earnings before taxes $ 500,000
Taxes (40%) 200,000
Earnings after taxes $ 300,000
12. In problem 11, assume the term structure of interest rates becomes inverted, with short-
term rates going to 11 percent and long-term rates 4 percentage points lower than short-
term rates.
If all other factors in the problem remain unchanged, what will earnings after taxes be?

6-12. Solution:
Colter Steel (Continued)
Long-term interest expense = 7% × $3,200,000 = $224,000
Short-term interest expense = 11% × 1,000,000 = 110,000
Total interest expense $334,000
Earnings before interest and taxes $996,000
Interest expense 334,000
Earnings before taxes $662,000
Taxes (40%) 264,800
Earnings after taxes $397,200
13. Guardian, Inc., is trying to develop an asset-financing plan. The firm has $400,000 in
temporary current assets and $300,000 in permanent current assets. Guardian also has
$500,000 in fixed assets. Assume a tax rate of 40 percent.
a. Construct two alternative financing plans for Guardian. One of the plans should be
conservative, with 75 percent of assets financed by long-term sources, and the other
should be aggressive, with only 56.25 percent of assets financed by long-term sources.
The current interest rate is 15 percent on long-term funds and 10 percent on short-term
financing.
b. Given that Guardian’s earnings before interest and taxes are $200,000, calculate
earnings after taxes for each of your alternatives.
c. What would happen if the short-and long-term rates were reversed?

6-13. Solution:
Guardian, Inc.
a. Temporary current assets $ 400,000
Permanent current assets 300,000
Fixed assets 500,000
Total assets $1,200,000
Conservative
% of Interest Interest
Amount Total Rate Expense
$1,200,000 × .75 = $900,000 ×.15 = $135,000 Long-term
$1,200,000 × .25 = $300,000 ×.10 = 30,000 Short-term
Total interest charge $165,000
Aggressive
$1,200,000 × .5625 = $675,000 × .15 = $101,250 Long-term
$1,200,000 × .4375 = $525,000 × .10 = 52,500 Short-term
Total interest charge $153,750
6-13. (Continued)
b. Conservative Aggressive
EBIT $200,000 $200,000
–Int 165,000 153,750
EBT 35,000 46,250
Tax 40% 14,000 18,500
EAT $ 21,000 $ 27,750
c. Reversed:
Conservative
$1,200,000 × .75 = $900,000 ×.10 = $ 90,000 Long-term
$1,200,000 × .25 = $300,000 ×.15 = 45,000 Short-term
Total interest charge $135,000
Aggressive
$1,200,000 × .5625 = $675,000 ×.10 =$67,500 Long-term
$1,200,000 × .4375 = $525,000 ×.15 = 78,750 Short-term
Total interest charge $146,250
Reversed Conservative Aggressive
EBIT $200,000 $200,000
–Int 135,000 146,250
EBT 65,000 53,750
Tax 40% 26,000 21,500
EAT $ 39,000 $ 32,250
14. Lear, Inc., has $800,000 in current assets, $350,000 of which are considered permanent
current assets. In addition, the firm has $600,000 invested in fixed assets.
a. Lear wishes to finance all fixed assets and half of its permanent current assets with
long-term financing costing 10 percent. Short-term financing currently costs 5 percent.
Lear’s earnings before interest and taxes are $200,000. Determine Lear’s earnings after
taxes under this financing plan. The tax rate is 30 percent.
b. As an alternative, Lear might wish to finance all fixed assets and permanent current
assets plus half of its temporary current assets with long-term financing. The same
interest rates apply as in part a. Earnings before interest and taxes will be $200,000.
What will be Lear’s earnings after taxes? The tax rate is 30 percent.
c. What are some of the risks and cost considerations associated with each of these
alternative financing strategies?

6-14. Solution:
Lear, Inc.
a.
Current assets – permanent current assets = temporary current assets
$800,000 – $350,000 = $450,000
Short-term interest expense = 5% [$450,000 + ½ ($350,000)]
= 5% ($625,000)
= $31,250
Long-term interest expense = 10% [$600,000 + ½($350,000)]
= 10% ($775,000)
= $77,500
Total interest expense = $31,250 + $77,500
= $108,750
Earnings before interest and taxes $200,000
Interest expense 108,750
Earnings before taxes $ 91,250
Taxes (30%) 27,375
Earnings after taxes $ 63,875
6-14. (Continued)
b. Alternative financing plan
Short-term interest expense = 5% [½ ($450,000)]
= 5% ($225,000)
= $11,250
Long-term interest expense = 10% [$600,000 + $350,000
+ ½ ($450,000)]
= 10% ($1,175,000)
= $117,500
Total interest expense =$11,250 + $117,500
=$128,750
Earnings before interest and taxes $200,000
Interest expense 128,750
Earnings before taxes $ 71,250
Taxes (30%) 21,375
Earnings after taxes $ 49,875
c. The alternative financing plan which calls for more financing
by high-cost debt is more expensive and reduces aftertax
income by $14,000. However, we must not automatically
reject this plan because of its higher cost since it has less risk.
The alternative provides the firm with long-term capital
which at times will be in excess of its needs and invested in
marketable securities. It will not be forced to pay higher
short-term rates on a large portion of its debt when short-
term rates rise and will not be faced with the possibility of no
short-term financing for a portion of its permanent current
assets when it is time to renew the short-term loan.
15. Using the expectations hypothesis theory for the term structure of interest rates, determine
the expected return for securities with maturities of two, three, and four years based on the
following data. Do an analysis similar to that in Table 6-6.

1-year T-bill at beginning of year 1 6%

1-year T-bill at beginning of year 2 7%
1-year T-bill at beginning of year 3 9%
1-year T-bill at beginning of year 4 11%

6-15. Solution:
2 year security (6% + 7%)/2 = 6.5%
3 year security (6% + 7% + 9%)/3 = 7.33%
4 year security (6% + 7% + 9% + 11%)/4 = 8.25%
Procter Micro-Computers, Inc., requires $1,200,000 in financing over the next two years. The
firm can borrow the funds for two years at 9.5 percent interest per year. Mr. Procter decides
to do economic forecasting and determines that if he utilizes short-term financing instead,
he will pay 6.55 percent interest in the first year and 10.95 percent interest in the second
year. Determine the total two-year interest cost under each plan. Which plan is
less costly?

6-7. Solution:
Procter-Mini-Computers, Inc.
Cost of Two Year Fixed Cost Financing
$1,200,000 borrowed × 9.5% per annum × 2 years = $228,000 interest
Cost of Two Year Variable Short-term Financing
1st year $1,200,000 × 6.55% per annum = $ 78,600 interest cost
2nd year $1,200,000 × 10.95% per annum = $131,400 interest cost
$210,000 two-year total
The short-term plan is less costly.
8. Sauer Food Company has decided to buy a new computer system with an expected life of
three years. The cost is $150,000. The company can borrow $150,000 for three years at
10 percent annual interest or for one year at 8 percent annual interest.
How much would Sauer Food Company save in interest over the three-year life of the
computer system if the one-year loan is utilized and the loan is rolled over (reborrowed)
each year at the same 8 percent rate? Compare this to the 10 percent three-year loan. What
if interest rates on the 8 percent loan go up to 13 percent in year 2 and 18 percent in year 3?
What would be the total interest cost compared to the 10 percent, three-year loan?

6-8. Solution:
Sauer Food Company
If Rates Are Constant
$150,000 borrowed × 8% per annum × 3 years =
$36,000 interest cost
$150,000 borrowed × 10% per annum × 3 years =
$45,000 interest cost
$45,000 – $36,000 = $9,000 interest savings borrowing
short-term
If Short-term Rates Change
1st year $150,000 × .08 = $12,000
2nd year $150,000 × .13 = $19,500
3rd year $15,000 × .18 = $27,000
Total = $58,500
$58,500 – $45,000 = $13,500 extra interest costs
borrowing short-term.
9. Assume Stratton Health Clubs, Inc., has $3,000,000 in assets. If it goes with a low liquidity
plan for the assets, it can earn a return of 20 percent, but with a high liquidity plan, the
return will be 13 percent. If the firm goes with a short-term financing plan, the financing
costs on the $3,000,000 will be 10 percent, and with a long-term financing plan, the
financing costs on the $3,000,000 will be 12 percent. (Review Table 6-11 for parts a, b,
and c of this problem.)
a. Compute the anticipated return after financing costs with the most aggressive asset-
financing mix.
b. Compute the anticipated return after financing costs with the most conservative asset-
financing mix.
c. Compute the anticipated return after financing costs with the two moderate approaches
to the asset-financing mix.
d. Would you necessarily accept the plan with the highest return after financing costs?
Briefly explain.

6-9. Solution:
Stratton Health Clubs, Inc.
a. Most aggressive
Low liquidity/high return $3,000,000 × 20% = $600,000
Short-term financing –3,000,000 × 10% = –300,000
Anticipated return $300,000
b. Most conservative
High liquidity/low return $3,000,000 × 13% = $390,000
Long-term financing –3,000,000 × 12% = –360,000
Anticipated return $ 30,000
c. Moderate approach
Low liquidity $3,000,000 × 20% = $600,000
Long-term financing –3,000,000 × 12% = –360,000
$240,000
OR
High liquidity $3,000,000 × 13% = $390,000
Short-term financing –3,000,000 × 10% = –300,000
$ 90,000
6-9. (Continued)
d. You may not necessarily select the plan with the highest
return. You must also consider the risk inherent in the plan.
Of course, some firms are better able to take risks than
others. The ultimate concern must be for maximizing the
overall valuation of the firm through a judicious
consideration of risk-return options.
10. Assume that Atlas Sporting Goods, Inc., has $800,000 in assets. If it goes with a low-
liquidity plan for the assets, it can earn a return of 15 percent, but with a high-liquidity plan
the return will be 12 percent. If the firm goes with a short-term financing plan, the
financing costs on the $800,000 will be 8 percent, and with a long-term financing plan, the
financing costs on the $800,000 will be 10 percent. (Review Table 6-11 on page 173 for
parts a, b, and c of this problem.)
a. Compute the anticipated return after financing costs with the most aggressive asset-
financing mix.
b. Compute the anticipated return after financing costs with the most conservative asset-
financing mix.
c. Compute the anticipated return after financing costs with the two moderate approaches
to the asset-financing mix.
d. If the firm used the most aggressive asset-financing mix described in part a and had the
anticipated return you computed for part a, what would earnings per share be if the tax
rate on the anticipated return was 30 percent and there were 20,000 shares outstanding?
e. Now assume the most conservative asset-financing mix described in part b will be
utilized. The tax rate will be 30 percent. Also assume there will only be 5,000 shares
outstanding. What will earnings per share be? Would it be higher or lower than the
earnings per share computed for the most aggressive plan computed in part d?
6-10. Solution:
Atlas Sporting Goods, Inc.
a. Most aggressive
Low liquidity $800,000 × 15% = $120,000
Short-term financing 800,000 × 8% = –64,000
Anticipated return $ 56,000
b. Most conservative
High liquidity $800,000 × 12% = $ 96,000
Long-term financing 800,000 × 10% = –80,000
Anticipated return $ 16,000
c. Moderate approach
Low liquidity $800,000 × 15% = $120,000
Long-term financing 800,000 × 10% = –80,000
Anticipated return $ 40,000
OR
High liquidity $800,000 × 12% = $ 96,000
Short-term financing 800,000 × 8% = –64,000
Anticipated return $ 32,000
d. Anticipated return $ 56,000
– taxes (30%) 16,800
Earnings after taxes 39,200
Shares 20,000
Earnings per share $1.96
e. Anticipated return $ 16,000
–taxes (30%) 4,800
Earnings after taxes 11,200
Shares 5,000
Earnings per share $2.24
It is higher ($2.24 vs. $1.96)
11. Colter Steel has $4,200,000 in assets.

Temporary current assets ......................... $1,000,000

Permanent current assets .......................... 2,000,000
Fixed assets .............................................. 1,200,000
Total assets ......................................... $4,200,000

Short-term rates are 8 percent. Long-term rates are 13 percent. Earnings before interest and
taxes are $996,000. The tax rate is 40 percent.
If long-term financing is perfectly matched (synchronized) with long-term asset needs,
and the same is true of short-term financing, what will earnings after taxes be? For a
graphical example of perfectly matched plans, see Figure 6-5.

6-11. Solution:
Colter Steel
Long-term financing equals:
Permanent current assets $2,000,000
Fixed assets 1,200,000
$3,200,000
Short-term financing equals:
Temporary current assets $1,000,000
Long-term interest expense = 13% × $3,200,000 = $ 416,000
Short-term interest expense = 8% × 1,000,000 = 80,000
Total interest expense $ 496,000
Earnings before interest and taxes $ 996,000
Interest expense 496,000
Earnings before taxes $ 500,000
Taxes (40%) 200,000
Earnings after taxes $ 300,000
12. In problem 11, assume the term structure of interest rates becomes inverted, with short-
term rates going to 11 percent and long-term rates 4 percentage points lower than short-
term rates.
If all other factors in the problem remain unchanged, what will earnings after taxes be?

6-12. Solution:
Colter Steel (Continued)
Long-term interest expense = 7% × $3,200,000 = $224,000
Short-term interest expense = 11% × 1,000,000 = 110,000
Total interest expense $334,000
Earnings before interest and taxes $996,000
Interest expense 334,000
Earnings before taxes $662,000
Taxes (40%) 264,800
Earnings after taxes $397,200
13. Guardian, Inc., is trying to develop an asset-financing plan. The firm has $400,000 in
temporary current assets and $300,000 in permanent current assets. Guardian also has
$500,000 in fixed assets. Assume a tax rate of 40 percent.
a. Construct two alternative financing plans for Guardian. One of the plans should be
conservative, with 75 percent of assets financed by long-term sources, and the other
should be aggressive, with only 56.25 percent of assets financed by long-term sources.
The current interest rate is 15 percent on long-term funds and 10 percent on short-term
financing.
b. Given that Guardian’s earnings before interest and taxes are $200,000, calculate
earnings after taxes for each of your alternatives.
c. What would happen if the short-and long-term rates were reversed?

6-13. Solution:
Guardian, Inc.
a. Temporary current assets $ 400,000
Permanent current assets 300,000
Fixed assets 500,000
Total assets $1,200,000
Conservative
% of Interest Interest
Amount Total Rate Expense
$1,200,000 × .75 = $900,000 ×.15 = $135,000 Long-term
$1,200,000 × .25 = $300,000 ×.10 = 30,000 Short-term
Total interest charge $165,000
Aggressive
$1,200,000 × .5625 = $675,000 × .15 = $101,250 Long-term
$1,200,000 × .4375 = $525,000 × .10 = 52,500 Short-term
Total interest charge $153,750
6-13. (Continued)
b. Conservative Aggressive
EBIT $200,000 $200,000
–Int 165,000 153,750
EBT 35,000 46,250
Tax 40% 14,000 18,500
EAT $ 21,000 $ 27,750
c. Reversed:
Conservative
$1,200,000 × .75 = $900,000 ×.10 = $ 90,000 Long-term
$1,200,000 × .25 = $300,000 ×.15 = 45,000 Short-term
Total interest charge $135,000
Aggressive
$1,200,000 × .5625 = $675,000 ×.10 =$67,500 Long-term
$1,200,000 × .4375 = $525,000 ×.15 = 78,750 Short-term
Total interest charge $146,250
Reversed Conservative Aggressive
EBIT $200,000 $200,000
–Int 135,000 146,250
EBT 65,000 53,750
Tax 40% 26,000 21,500
EAT $ 39,000 $ 32,250
14. Lear, Inc., has $800,000 in current assets, $350,000 of which are considered permanent
current assets. In addition, the firm has $600,000 invested in fixed assets.
a. Lear wishes to finance all fixed assets and half of its permanent current assets with
long-term financing costing 10 percent. Short-term financing currently costs 5 percent.
Lear’s earnings before interest and taxes are $200,000. Determine Lear’s earnings after
taxes under this financing plan. The tax rate is 30 percent.
b. As an alternative, Lear might wish to finance all fixed assets and permanent current
assets plus half of its temporary current assets with long-term financing. The same
interest rates apply as in part a. Earnings before interest and taxes will be $200,000.
What will be Lear’s earnings after taxes? The tax rate is 30 percent.
c. What are some of the risks and cost considerations associated with each of these
alternative financing strategies?

6-14. Solution:
Lear, Inc.
a.
Current assets – permanent current assets = temporary current assets
$800,000 – $350,000 = $450,000
Short-term interest expense = 5% [$450,000 + ½ ($350,000)]
= 5% ($625,000)
= $31,250
Long-term interest expense = 10% [$600,000 + ½($350,000)]
= 10% ($775,000)
= $77,500
Total interest expense = $31,250 + $77,500
= $108,750
Earnings before interest and taxes $200,000
Interest expense 108,750
Earnings before taxes $ 91,250
Taxes (30%) 27,375
Earnings after taxes $ 63,875
6-14. (Continued)
b. Alternative financing plan
Short-term interest expense = 5% [½ ($450,000)]
= 5% ($225,000)
= $11,250
Long-term interest expense = 10% [$600,000 + $350,000
+ ½ ($450,000)]
= 10% ($1,175,000)
= $117,500
Total interest expense =$11,250 + $117,500
=$128,750
Earnings before interest and taxes $200,000
Interest expense 128,750
Earnings before taxes $ 71,250
Taxes (30%) 21,375
Earnings after taxes $ 49,875
c. The alternative financing plan which calls for more financing
by high-cost debt is more expensive and reduces aftertax
income by $14,000. However, we must not automatically
reject this plan because of its higher cost since it has less risk.
The alternative provides the firm with long-term capital
which at times will be in excess of its needs and invested in
marketable securities. It will not be forced to pay higher
short-term rates on a large portion of its debt when short-
term rates rise and will not be faced with the possibility of no
short-term financing for a portion of its permanent current
assets when it is time to renew the short-term loan.
15. Using the expectations hypothesis theory for the term structure of interest rates, determine
the expected return for securities with maturities of two, three, and four years based on the
following data. Do an analysis similar to that in Table 6-6.

1-year T-bill at beginning of year 1 6%

1-year T-bill at beginning of year 2 7%
1-year T-bill at beginning of year 3 9%
1-year T-bill at beginning of year 4 11%

6-15. Solution:
2 year security (6% + 7%)/2 = 6.5%
3 year security (6% + 7% + 9%)/3 = 7.33%
4 year security (6% + 7% + 9% + 11%)/4 = 8.25%