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Save Early Many financial advisers would suggest that you save early for your retirement. The reason is relatively few years of contributions to your retirement plan made early in your life are equivalent to many more years of contributions made later in your life. In order to understand this point better, we consider the following exercise. Suppose there are two investors: A and B. Both plan to retire after T years but save for their retirement in very different ways. Investor A puts $1 into his retirement account at the beginning of each year for T years (i.e., at t = 0,1,...,T − 1). Investor B does not make any contributions for the first N years, and try to make it up with more contributions at the start of each year for the remaining T − N years, i.e., he will make contributions at t = N, N + 1, . . . , T − 1. (a) Suppose Investor B wants to have the same amount of money as Investor A when both of them retire. What is the annual contribution that Investor B has to make in the remaining T − N years. Express your answer as a function of r, N and T . (b) Suppose r = 0.02/year and T = 60 years. Plot the annual contribution that Investor B has to make in part (a) as a function of N for 0 ≤ N ≤ 40 years. Repeat the same exercise for r = 0.04/year and r = 0.06/year.
What is the future value in the account after seven? years?
Midwest Electric Company (MEC) uses only debt and common equity. It can borrow unlimited amounts at an interest rate of rd = 10% as long as it finances at its target capital structure, which calls for 30% debt and 70% common equity. What is its cost ..
Rotary Bearings has just announced that their next dividend will be $2.25. In the announcement, management has projected that earnings will grow at 10 percent per year until the end of year 5, then slow to 5 percent for the following 5 years and then..
Venture Corp issued 7 year 5% bonds due 2023 at par. This bond pays interest on a semi-annual basis. However, right after Venture issued the bonds, the Company missed its first earnings and at the same time, the interest rate environment changed. Ass..
Dye Trucking raised $280 million in new debt and used this to buy back stock. After the recap, Dye's stock price is $7.75. If Dye had 45 million shares of stock before the recap, how many shares does it have after the recap?
Consider the following three credit card offers. Find the APY for each credit card, and decide which card offers the best deal for the customer.
What is its cost of common equity and its WACC?
How much will you have in the account after twenty years?
Constant Growth Model Peter's Pickle Chips (PPC) paid $2 in dividends this past year. Analysts expect this payment will grow at 6 percent annually for the indenite future. What are the expected dividends for the next two years (i.e. DIV1 and DIV2)? W..
What is the PV of a perpetuity paying $30 each month, beginning next month, if the annual interest rate is a constant effective 12.68% per year?
What is the maximum annual interest rate that Brown Company should pay on borrowed funds? Why?- What are some of the intangible disadvantages associated with forgoing the discount?
Orange Computer, Inc.’s stock prices at the end of the last four years were $25, $27.50, $22.50 and $28.75. Each year they paid a dividend of $1 at the end of each year. What are your arithmetic and geometric average time-weighted rates of return? Wh..
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