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Assume you are 25 years old. The IAW insurance company is offering you the following retirement contract (called an annuity): Contribute $2,000 per year for the next 40 years.
When you reach 65 years of age, you will receive $30,000 per year for as long as you live.
Assume that you believe that the chance that you will die is 10% per year after you will have reached 65 years of age.
In other words, you will receive the first payment with probability 90%, the second payment with probability 81%, and so on. Assume the prevailing interest rate is 5% per year, all payments occur at year end, and it is January 1 now. Is this annuity a good deal?
If a firm desires to finance new projects with 65% retained earnings and 35% debt, what is its weighted average cost of capital (WACC) if its equity’s required rate of return is 14% and its new debt issues are expected to yield 6.5%. The corporation’..
Prepare a memo to you staff explaining the steps that will be needed to construct a pro-forma financial statement for your company. Be sure to address the following: The forecast 201 x income statements, The forecast the 201x balance Sheet, Raising t..
Your grandmother asks for your help in choosing a certificate of deposit (CD) from a bank with a one year maturity and a fixed interest rate. If the first certificate of deposit, #1 pays 2.95 percent APR compounded annually, the EAR for the deposit i..
Johnson Electronics is considering extending trade credit to some customers previously considered poor risks. Sales would increase by $180,000 if credit is extended to these new customers. Compute the incremental income after taxes. If the accounts r..
You are the financial analyst for the Glad It’s Finally Over Company. The director of capital budgeting has asked you to analyze a proposed capital investment. The project has a cost of $20,000, and the cost of capital is 10 percent. What is the proj..
Stephenson Real Estate Company was founded 25 years ago by the current CEO, Robert Stephenson. The company purchases real estate, including land and buildings, and rents the property to tenants. Which method of financing maximizes the per-share stock..
Kerri purchased a term insurance policy when she had high life insurance needs and limited income. Now she can afford whole life insurance. What term life insurance provision will permit Kerri to switch her term insurance to whole life insurance with..
A lease agreement that qualifies as a capital lease calls for annual lease payments of $36,000 over a four-year lease term, with the first payment at January 1, the lease’s inception. If Lessee’s fiscal year is the calendar year, complete the amortiz..
Is there any trade-off between the financial performance and the sustainability of the company?
A couple thinking about retirement decide to put aside $2,300 each year in a savings plan that earns 9% interest. In 15 years they will receive a gift of $27,000 that also can be invested. How much money will they have accumulated 30 years from now?
You have saved $4,000 for a down payment on a new car. The largest monthly payment you can afford is $350. The loan will have a 10% APR based on end-of-month payments. What is the most expensive car you could afford if you finance it for 48 months?
Exemption of food purchases from a sales tax reduces regressively because:
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