ANSWER ALL QUESTIONS.
You must show the formula/equation used to arrive at your answer for questions 1-4. Points will be deducted if you do not show the formulas and how you arrived at your answers.
1. After graduation, you plan to work for Johnson Corporation for 7 years and then start your own business. You expect to save and deposit $4,000 a year for the first 3 years (t = 1 through t = 3 and $14,000 annually for the following 4 years (t = 4 through t = 7). The first deposit will be made a year from today. In addition, your grandfather gave you a $20,000 graduation gift which you will deposit at the end of year one. If the account earns 11% compounded annually, how much will you have when you start your business 7 years from now?
2. Your sister turned 25 today, and she is planning to save $3,500 per year for retirement, with the first deposit to be made one year from today. She will invest in a mutual fund that’s expected to provide a return of 7% per year. She plans to retire 40 years from today, when she turns 65, and she expects to live for 25 years after retirement, to age 90. Under these assumptions, how much can she spend each year after she retires? Her first withdrawal will be made at the end of her first retirement year and she will earn 7% per year.
3. Adam’s Inc.’s outstanding common stock is currently selling in the market for $28. Dividends of $1.80 per share were paid last year, and the company expects annual growth of 6%.
(a) What is the value of the stock to you, given a 11% required rate of return?
(b) Determine the expected rate of return for the stock.
(c) Should you purchase this stock? Why?
4. Sampson food company has a 14% annual coupon interest rate on a $1,000 par value bond with 15 years left to maturity. Bonds of same maturity now sell to yield 12% return.
(a) How much would you be willing to pay for one of these bonds today? Why?
(b) If the bond is selling for $ 1,150 what is the yield to maturity?
(c) Will you buy this bond? Explain in detail what key factors you will consider in making your decision.
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