Your retirement account has a current balance of $50,000. What interest rate wou

Question

Your retirement account has a current balance of $50,000. What interest rate would need to be earned in order to accumulate a total of $1,000,000 in 30 years, by adding $6,000 annually?

A. 5.02%

B. 7.24%

C. 9.80%

D. 10.07%

The present value of an annuity stream of $100 per year is $614 when valued at a 10% rate. By approximately how much would the value change if these were annuities due?

A. $10

B. $61.40

C. $10 × Number of years in annuity stream

D. $6.14 × Number of years in annuity stream

How much of a stock's $30 price is reflected in PVGO if it expects to earn $4 per share, has an expected dividend of $2.50, and a required return of 20%?

A. $0

B. $6

C. $8

D. $10

What proportion of earnings is being plowed back into the firm if the sustainable growth rate is 8% and the firm's ROE is 20%?

A. 60%

B. 80%

C. 20%

D. 40%

Explanation / Answer

Question Computaion Answer Your retirement account has a current balance of $50,000. What interest rate would need to be earned in order to accumulate a total of $1,000,000 in 30 years, by adding $6,000 annually? The FV of the 30 payments and the $50,000 must be $1,000,000, or: FV = 1,000,000 = 6,000 x FVIFA(r,30) + 50,000 x (1+r)30 (In your calculator: PV = 50,000 ; PMT = 6,000 ; FV = -1,000,000 ; n = 30) Solving for r, we find r = 7.24% B 7.24% The present value of an annuity stream of $100 per year is $614 when valued at a 10% rate. By approximately how much would the value change if these were annuities due? Difference = $614(1.10) - $614 = $61.40 B=61.40 What proportion of earnings is being plowed back into the firm if the sustainable growth rate is 8% and the firm's ROE is 20%? Plowback ratio=($4-$2.5)/$4=37.5%, Growth rate g = 20%*37.5%=7.5% Stock price without growth opportunity = Div/(r-g)=$2.5/(20%-7.5%)=$20. PVGO=market price – price without growth opportunity =$30-$20=$10 D 10 What proportion of earnings is being plowed back into the firm if the sustainable growth rate is 8% and the firm's ROE is 20%? 8% = 20% x plowback ie Plowback =40% D 40%

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