Solution_Midterm1_spring08

Solution_Midterm1_spring08 - Question 1 In this question...

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Question 1 In this question you need first to calculate the Future Value of the monthly deposits you will make every month, for 30 years, in the Stock and Bond Account. The aggregate value will them become the Present Value of the monthly withdrawals you will do for 25 years. The rates presented to you are Stated Annual Rates; the time length between the deposits and the withdrawals is a month so you have that for the Stock Account the interest rate is 11%/12, for the bond Account the interest rate is 7%/12 and for the retirement account the interest rate is 9%/12. So, the solution to the problem is ? = $700 0.11 12 1 − ± 1 1 + 0.11 12 ² 30 12 ³ ´ 1 + 0.11 12 µ 30 12 = $1,963,163.82 = $300 0.07 12 1 − ± 1 1 + 0.07 12 ² 30 12 ³ ´ 1 + 0.07 12 µ 30 12 = $365,991.3 Then, the aggregate amount in the retirement account will be $2,329,155.12 To find the value withdrew every month, we just need to solve the following equation $2,329,155.12 = ? 0.09 12 1 − ± 1 1 + 0.09 12 ² 25 12 ³ The solution is W=$19,546.19 Question 2 a) In this question you are told the company will not pay any of the following 5 Earnings. It will start only paying 40% of the Earnings after that. You are also told that the return on retained Earnings for the first part will be 20% and for the second part will be 15%.
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This means that the growth rate of Earnings will be 20% (100%*20%) for the period when the company retains all Earnings and 9% (60%*15%) for the period when the firm only retains 60% of the Earnings. The key here is to find which will be the first Earning that will not be totally
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Solution_Midterm1_spring08 - Question 1 In this question...

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