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




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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