Week 3 Fin 419 Assignment Essay

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FIN/419 - Week 3 Individual Assignment form the readings

P4–23 (LG-2/LG-3) Funding your retirement you plan to retire in exactly 20 years. Your goal is to create a fund that will allow you to receive $20,000 at the end of each year for the 30 years between retirement and death (a psychic told you would die exactly 30 years after you retire). You know that you will be able to earn 11% per year during the 30-year retirement period.
a. How large a fund will you need when you retire in 20 years to provide the 30-year, $20,000 retirement annuity? n= 30 r= 11.00% PVIFA= 30 periods, 11% Rate = 8.693793
Annuity= 20,000 / Present value = $173,876 = 20000 X 8.693793
Answer= $ 173,876 Retirement money required

b. How much will you
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Bo= I x (PVIFA kd%, n) +M x (PVIF kd%, n)
Bo= 120 x (PVIFA 10%, 16) +M x (PVIF 10%, 16)
Bo= $120 x (7.824) +$1,000 x (0.218)
Bo= $ 938.88 + $ 218
Bo= $ 1,156.88
Answer: $ 1,156.88

b. Describe the two possible reasons why the rate on similar-risk bonds is below the coupon interest rate on the Complex Systems bond.
The complex System bonds were issued there may have been a shift within the supply and demand to the money or it could have been a change method to the risk factor of the firm.

c. If the required return were at 12% instead of 10%, what would the current value of Complex Systems’ bond be? Contrast this finding with your findings in part A and discuss.
Bo= I x (PVIFA kd%, n) +M x (PVIF kd%, n)
Bo= 120 x (PVIFA 12%, 16) +M x (PVIF 12%, 16)
Bo= $120 x (6.974) +$1,000 x (0.163)
Bo= $ 836.88 + $ 163
Bo= $ 999.88
Answer: $ 999.88

P7–6 (LG-4) Common stock valuation—Zero growth Scotto Manufacturing is a mature firm in the machine tool component industry. The firm’s most recent common stock dividend was $2.40 per share. Because of its maturity as well as its stable sales and earnings, the firm’s management feels that dividends will remain at the current level for the foreseeable future.
a. If the required return is 12%, what will be the value of Scotto’s common stock?
b. If the firm’s risk as perceived by market participants