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Saving for Retirement. Suppose you are a 25-year-old employee earning $35,000 per year salary. You plan to retire in 40 years at age 65. Assume that the Central Bank is successful at maintaining inflation at its target rate of 2% over the next 40 years and also assume that your salary not only keeps up with inflation, but you also advance in your career, receiving salary increases resulting from your greater experience level (and presumed higher productivity). Therefore, suppose your salary increases at 3% per year = inflation rate + a real growth of 1% per year. • In 2057, your expected salary is = Po(1+i)n = (35,000)(1+i)40 = _____________. [Use Table A-3, assuming n = 40 and i = 3%.] • You expect to retire in 2057 at age 65. Financial advisors indicate that you will need about 80% of your salary at retirement in order to live at about the same standard of living. Therefore, you want to have how much available in your first year of retirement? Amount needed in first year of retirement = (0.8)$____________ (your salary at retirement calculated in problem above) = $________________. • Suppose you anticipate an annual retirement income (e.g., perhaps Social Security or other defined benefit retirement plan) of $60,000 in 2057 [i.e., the present Social Security retirement indexed to inflation, but also assuming retirement plans are struggling to meet financial commitments]. Your personal savings must cover the shortfall of $_______________. • Based on long-term stock/bond market returns, financial advisors suggest that a safe withdrawal rate from one’s retirement nest egg [to avoid depleting the nest egg prematurely] is about 4%. Thus, if a 4% withdrawal rate = $____________ (shortfall from above), you need (25)($___________) = $______________ nest egg at retirement to sustain your retirement. • Given that you need a total nest egg of $_______________ in 2057, how much do you need to save annually to achieve this goal? Assume a diversified portfolio of stocks and bonds generates a CAGR of 7%. Use Annuity Table A-4, assuming n = 40 and i = 7%. My target savings rate per year = $_________________/(factor in Annuity Table) = $________________, or $_________ per month.
Assume, the stock is sold for $10.50. The dividend just paid is $1 and expected to grow at the rate of 5% annually. What is the required return? What is the dividend yield? What is the capital gains yield?
Suppose you are going to receive $13,500 per year for five years. The appropriate inerest rate is 8.4 percent. What is the present value of the payments if they are in the form of an ordinary annuity and what is the present value if the payments are ..
Titan Mining Corporation has 9.8 million shares of common stock outstanding, 420,000 shares of 5 percent preferred stock outstanding and 220,000 8.6 percent semi annual bonds outstanding, par value $1,000 each. What is the firm’s market value capital..
Which of the following had the greases ex-post returns based on historic sample measures?
General Electric has just issued a callable (at par) ten-year 8% coupon bond with annual coupon payments. The bond can be called at par in one year or anytime thereafter on a coupon payment date. It has a price of $104 and a face value of $104. What ..
A Swiss sporting goods company borrows in yen in the Euro credit market at a rate of 4.91 percent from Bank of America using a three-month rollover loan. Bank of America assigns a default risk premium of 2.14 percent on the loan, and the country risk..
Ambrin Corp. expects to receive $2,000 per year for 20 years. What is the present value of this 20 year cash flow? Use an 9% discount rate
What regulations in the financial sector are likely to grow in the future?
A home equity line of credit (HELOC) is, loosely speaking, like a credit card for your home. You can borrow money by drawing down on the line of credit. But, because the borrowed money is for the purpose of your home, the interest is tax-deductible m..
Compact fluroscent lamps (CFLs) have become popular in recent years, but do they make financial sense? Suppose a typical 60-watt incandescent light bulb costs $.50 and lasts 1,000 hours. A Kilowatt-hour of electricity costs $.101, which is about nati..
Haunted Forest, Inc. is selling fog machines. Use the following information about Haunted Forest, Inc. to answer the following questions. Average selling price per unit $329. Variable cost per unit $203 Units sold 364 Fixed costs $16,717 Interest exp..
The Jackson–Timberlake Wardrobe Co. just paid a dividend of $1.50 per share on its stock. The dividends are expected to grow at a constant rate of 5 percent per year indefinitely. Investors require a return of 10 percent on the company's stock. What ..
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