You just turned 24 years old and want to retire when you turn 65. You plan to pu

Question

You just turned 24 years old and want to retire when you turn 65. You plan to put $3,700 every year into a ROTH IRA, a retirement account from which you can withdraw money after retirement without having to pay any taxes. You expect to earn a return of 7% on your investments every year.

1. How much money can you expect to have at age 65 if you make your first deposit now and your last one on the day you turn 64?

2. How much money can you expect to have at age 65 if you make your first deposit 10 years from now (at age 34) and your last one on the day you turn 64?

The preferred stock of General Motors pays $2 every quarter. The appropriate discount rate is 0.08 per quarter.

1.What is the fair value (intrinsic value) of a share of preferred stock?

2. What is the fair value (intrinsic value) of a share of preferred stock?

Your local loan shark offers weekly payday loans: You can borrow $1,000 and pay back $1,050 one week later (or lose a finger or two).

1. What is the APR on the loan?

You sold your online business to Yahoo. Yahoo agreed to pay you $50,000 now, $10,000 per year for the next 9 years and $100,000 in 10 years if the business meets certain performance targets. If you invested the money, you would earn a return of 7%.

1. What is the present value of the combined cash flows, assuming the performance targets are met?

Explanation / Answer

1. Future value of annuity due:

3700 x 1.07(1.07.31 -1)/0.07

=$404107.17

The future value at the end of 31 years is $404107.17.

2. The years of deposit will be 21 years. We will multiply interst of 10 years

3700 x 1.0710x(1.07.21 -1)/0.07

=$326549.39

2. Fair intrinsic value = 2/0.08 = $25

3.1050 = 1000x(1+i)7

i=interest per day , 7 days in a week

1.05(1/7) = (1+i)

i = 0.699% =0.7%per day

APR =2.55 = 255.5%

1. Present Value

PV = 50000 + 10000(1-1.07-9)/0.07 + 100000x1.07-10

PV=$165987.25

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