1. Lucius Malfoy continues to invest in Firebolt using the dollar-cost-averaging
ID: 2773582 • Letter: 1
Question
1.
Lucius Malfoy continues to invest in Firebolt using the dollar-cost-averaging strategy. He has $750 budgeted to invest quarterly in the company. Last quarter the share price of Firebold was $37.50 and Lucius bought 20 shares. This quarter the the price has increased to $50 per share. When Lucius uses the dollar-cost-averaging strategy to invest this quarter, how much money will he spend to purchase shares of Firebolt?
Dollar-cost-averaging uses the same amount of money each time. What varies is the price per share. Consequently, some quarters he will be able to buy more shares (because the price is lower) and other quarters he will buy fewer shares (because the price is higher).
2.
Given the information from the previous question:
Lucius Malfoy continues to invest in Firebolt using the dollar-cost-averaging strategy. He has $750 budgeted to invest quarterly in the company. Last quarter the share price of Firebold was $37.50 and Lucius bought 20 shares. This quarter the the price has increased to $50 per share.
Using the dollar-cost-averaging investment strategy, how many shares will Lucius purchase this quarter?
total spent = cost per share * number of shares purchased
solve for number of shares purchased
Number of shares purchased = total spent/cost per share
3.
Lucius Malfoy has enjoyed an excellent return on his investment in Firebolt Corporation, averaging a 15% return this year. He knows, however, that the Real Rate of Return will reflect what he must pay in income taxes to the Ministry of Magic as well as the impact of inflation on his investment. Assuming Lucius is in the 30% federal income tax bracket and that inflation is estimated to be 3%, what is Lucius's Real Rate of Return?
Record your answer without using the % sign. Your answer will use 3 spaces beyond the decimal point.
RR of R = Real Rate of Return
R of R = Rate of Return
MTR = Marginal Tax Rate
R of I = Rate of Inflation
RR of R = [(1 - MTR) * R of R] - R of I
Lucius Malfoy continues to invest in Firebolt using the dollar-cost-averaging strategy. He has $750 budgeted to invest quarterly in the company. Last quarter the share price of Firebold was $37.50 and Lucius bought 20 shares. This quarter the the price has increased to $50 per share. When Lucius uses the dollar-cost-averaging strategy to invest this quarter, how much money will he spend to purchase shares of Firebolt?
Hint:Dollar-cost-averaging uses the same amount of money each time. What varies is the price per share. Consequently, some quarters he will be able to buy more shares (because the price is lower) and other quarters he will buy fewer shares (because the price is higher).
Explanation / Answer
1. Answer to Point one is clear from Hint itself, Dollar-cost-averaging uses the same amount of money each time. What varies is the price per share. Consequently, some quarters he will be able to buy more shares (because the price is lower) and other quarters he will buy fewer shares (because the price is higher). therefore he would invest $750
2. No. of Shares that he can buy is 15 nos i.e. 750 / 50
3. now formula for calculating Real rate of Return is
RR of R = [(1 - MTR) * R of R] - R of I
where R of R = 15%, R of I = 3%, t= 30%
now RR of R = (1-0.3)*0.15 - 0.03
Real rate of Return = 7.5%
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