# Midterm_Winter_2008_Answers - York University Economics...

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York University Economics 4400, Midterm Examination February 7, 2008 Instructions. Write your name and student number at the top of this page. Answer four out of six questions below. Each question answered is worth 10 points, the total is 40 points.Be clear what formulas you use to arrive at a solution, the actual numerical answers are not important. If you think a question is ambiguous or not enough information is provided to answer it, explain why.You have 75 minutes. 1. Person X starts saving for retirement at age 26, depositing \$1,000 each year until retirement at age 65. To diversity holdings, X deposits savings on three separate accounts. From age 26 to 35, X deposits his retirement savings at bank A, between ages 36 and 45 at bank B, from age 46 to age 65 at C. Other than at years speci°ed above, nothing is added to or withdrawn from accounts until retirement. (a) What are total values of the accounts at age 65 (in age 65 dollars). Give three separate formulas for A, B, C. (b) In retirement starting at age 66, X plans to spends equal amount a each year in perpetuity (A plans to live forever). What a is a/ordable? Give formula. (c) Suppose as before that X deposits \$1,000 a year at bank A from age 26 to age 35 but afterwards he plans his savings at B, C in such a way so that balance on each account is the same when he retires at 65. How much per year should he deposit at B, C? a. A = \$1000 r h 1 ° 1 (1+ r ) 10 i (1 + r ) 40 B = \$1000 r h 1 ° 1 (1+ r ) 10 i (1 + r ) 30 C = \$1000 r h 1 ° 1 (1+ r ) 20 i (1 + r ) 20 b. a r = A + B + C c. b r h 1 ° 1 (1+ r ) 10 i (1 + r ) 30 = \$1000 r h 1 ° 1 (1+ r ) 10 i (1 + r ) 40 , solve for b c r h 1 ° 1 (1+ r ) 20 i (1 + r ) 20 = \$1000 r h 1 ° 1 (1+ r ) 10 i (1 + r ) 40 , solve for c . 1

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2. Discuss the di/erence between Market Value and Book Value of °rm±s equity. (a) How is each de°ned? (b) Consider a situation when °rm±s management realizes its next year earnings will be signi°cantly higher then previously expected. The °rm issues a statement about it.
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