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##### An investor who has just turned 35 wants to save for his retirement.

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**Question**

1. An investor who has just turned 35 wants to save for his retirement. He plans to retire on his;65th birthday and wants a monthly income, beginning the month after his 65th birthday, of $2,000;(after taxes) until he dies. Moreover, assume that;-;-;-;-;He will die at age 95.;Until he reaches age 65, the account earns 8% interest, compounded annually, which;accumulates tax-free.;At age 65, assume that the interest accumulated in the account is taxed as a lump sum at a;rate of 30%.;Thereafter, the investor is in a 0% tax bracket and the interest on his account earns 7%;compounded monthly.;How much should the investor deposit annually in his account beginning on his 35th birthday;and ending on his 64th birthday to finance his retirement?;2. GasPro Inc. stock is expected to sell for $10 per share four years from now. GasPro has just paid a;dividend of 50 cents per share. Dividends are expected to grow at a rate of 5 percent per year for the;next four years. Assume that the required rate of return for GasPro stock is 15 percent.;a. What is the expected constant growth rate beginning in year 5?;b. What will the price of GasPro stock be five years from now?;c. What is GasPros current stock price?;3. A project has perpetual cash flows of C per period, a cost of I, and a required return of R.;Algebraically, what is the relationship between the project's payback and its IRR? What does your;answer imply about the IRR for long-lived projects with relatively constant cash flows that pay back;sooner?;4. Caterpillar Inc. estimates the following unit sales for a new project;Year;1;2;3;4;5;Unit Sales;107,000;123,000;134,000;156,000;95,500;Production will require $800,000 in net working capital to start and additional net working;capital investments each year equal to 40 percent of the projected sales increase for the following;year (because sales are expected to fall in Year 5, there is no NWC cash flow occurring for Year;4, meanwhile, all of the invested NWC from Years 0-4 is recovered in Year 5). Total fixed costs;are $192,000 per year, variable production costs are $295 per unit, and the units are priced at;1;Prof. J. Ari Pandes;$395 each. The equipment needed to begin production has an installed cost of $19.5 million. The;equipment is considered industrial machinery and thus falls into Class 8 for tax purposes (20;percent). In five years, this equipment can be sold for about 30 percent of its acquisition cost.;Caterpillar Inc. is in the 40 percent marginal tax bracket and has a required return on all its;projects of 23 percent. Based on these preliminary project estimates, what is the NPV of the;project using the CCA tax-shield approach?;5. You are given the following information;State of the;Economy;High Growth;Moderate Growth;Recession;Probability of State;Stock A Return;Stock B Return;25%;20%;55%;40%;20%;10%;55%;25%;20%;a. Calculate the correlation coefficient between Stock A and Stock B.;b. Now, assuming the correlation coefficient is 1, calculate the weights for Stock A and Stock B;that would achieve a zero standard deviation.;2;View Full Attachment

Paper#30165 | Written in 18-Jul-2015

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