TVM Review Problems FIN621 Fall 2014
FIN621 Financial Policy for Managers
Fall 2014
Review: Time Value of Money
1. EASY STREET?
You are now 35 years old and will retire at the age of 65. While you currently have no savings, you are going to start a personal investment plan now and learn that you can expect the following average annual returns in various investments:
Investment
After-inflation return
Emerging stock market stocks
11.5%
Small-company U.S. stocks
9.0%
European and Asian stocks
8.2%
S&P 500 Index (large U.S. stocks)
7.2%
Art
4.0%
Residential real estate
2.8%
U.S. Corporate bonds
0.9%
Long-term U.S. government bonds
0.4%
Silver
-0.3%
(a) If you invest $10,000 each year for the next 30 years in small-company stocks how much would you retire with (before taxes)?
(b) Suppose you wanted to retire with enough to buy a 1,000 acre spread in the Hill Country with horses, a ranch house and a very large Winnebago ($6 million). If you were willing to put off retirement until 75 and set aside $10,000 a year, what investment categories could you have to be in to achieve this objective?
(c) Suppose you were risk-averse and would only invest in long-term government bonds. How many years would you have to save at $10,000 a year to get that ranch?
2. Fred McHamm of Publisher’s Outhouse announced you have just won $30,000,000! ---To be paid in $1,000,000 installments at the end of each of the next 30 years, of course!
If the appropriate discount rate is 7.5%, what is this really worth to you?
3. A benefactor proposes to set up an endowment for student scholarship at the Business
School. The proposal is to provide scholarship of $15,000 (at the end of) each year.
Suppose the interest rate earned by endowments is 4%. How much should the benefactor donate? What if the proposal is to provide $15,000 plus a raise of 3% each year?
4. You are buying a home listed at $220,000 and would like to arrange for a 30-year mortgage to finance the cost. You find that the local bank requires a
Fall 2014
Review: Time Value of Money
1. EASY STREET?
You are now 35 years old and will retire at the age of 65. While you currently have no savings, you are going to start a personal investment plan now and learn that you can expect the following average annual returns in various investments:
Investment
After-inflation return
Emerging stock market stocks
11.5%
Small-company U.S. stocks
9.0%
European and Asian stocks
8.2%
S&P 500 Index (large U.S. stocks)
7.2%
Art
4.0%
Residential real estate
2.8%
U.S. Corporate bonds
0.9%
Long-term U.S. government bonds
0.4%
Silver
-0.3%
(a) If you invest $10,000 each year for the next 30 years in small-company stocks how much would you retire with (before taxes)?
(b) Suppose you wanted to retire with enough to buy a 1,000 acre spread in the Hill Country with horses, a ranch house and a very large Winnebago ($6 million). If you were willing to put off retirement until 75 and set aside $10,000 a year, what investment categories could you have to be in to achieve this objective?
(c) Suppose you were risk-averse and would only invest in long-term government bonds. How many years would you have to save at $10,000 a year to get that ranch?
2. Fred McHamm of Publisher’s Outhouse announced you have just won $30,000,000! ---To be paid in $1,000,000 installments at the end of each of the next 30 years, of course!
If the appropriate discount rate is 7.5%, what is this really worth to you?
3. A benefactor proposes to set up an endowment for student scholarship at the Business
School. The proposal is to provide scholarship of $15,000 (at the end of) each year.
Suppose the interest rate earned by endowments is 4%. How much should the benefactor donate? What if the proposal is to provide $15,000 plus a raise of 3% each year?
4. You are buying a home listed at $220,000 and would like to arrange for a 30-year mortgage to finance the cost. You find that the local bank requires a