1. You are planning to save for retirement over the next 28 years. To do this, you will invest $7000 a year in a stock account and $3000 a year in a bond account. The return of the stock account is expected to be 11 percent, and the bond account will pay 8 percent. When you retire, you will combine your money into an account with a 9 percent return. How much can you withdraw each year from your account assuming a 25-year withdrawal period?
2.Mark Weinstein has been working on an advanced technology in laser eye surgery. His technology will be available in the near term. He anticipates his first annual cash flow from the technology to be $200,000, received two years from today. Subsequent annual cash flows will grow at 5 percent, in perpetuity. What is the present value of the technology if the discount rate is 10 percent? If the business is completely funded with equity, how much is the equity worth? If Weinstein held 50 percent of shares outstanding, how much would his shares be worth?
3. a.What is the price of a 10-year, pure discount bond paying $1,000 at maturity if the YTM is 10 percent?
b.At the end of year 5, with 5 more years to maturity, the investor could sell the above bond for its market value at the end of year 5 and buy a 5-year, 1 percent coupon bond at the same price (as the market value of the bond he is selling). Assume the market interest rate is still 10 percent. What should the investor do?
1. You are planning to save for retirement over the next 28 years. To do this, you will invest $7000 a year in a stock account and $3000 a year in a bond account. The return of the stock account is expected to be 11 percent, and the bond account will pay 8 percent. When you retire, you will combine your money into an account with a 9 percent return. How much can you withdraw each year from your account assuming a 25-year withdrawal period?
2.Mark Weinstein has been working on an advanced technology in laser eye surgery. His technology will be available in the near term. He anticipates his first annual cash flow from the technology to be $200,000, received two years from today. Subsequent annual cash flows will grow at 5 percent, in perpetuity. What is the present value of the technology if the discount rate is 10 percent? If the business is completely funded with equity, how much is the equity worth? If Weinstein held 50 percent of shares outstanding, how much would his shares be worth?
3. a.What is the price of a 10-year, pure discount bond paying $1,000 at maturity if the YTM is 10 percent?
b.At the end of year 5, with 5 more years to maturity, the investor could sell the above bond for its market value at the end of year 5 and buy a 5-year, 1 percent coupon bond at the same price (as the market value of the bond he is selling). Assume the market interest rate is still 10 percent. What should the investor do?
