Week 3 Individual Assignments Finance for Decision Making FIN/419 January 30, 2012

Chapter 4: Problem 4-23 – Personal Finance Problem
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?

$173,880 will be required to retire in 20 years to
“Increases in the basic cost of long-term funds or in risk will raise the required return; decreases in the cost of funds or in risk will lower the required return” (Gitman, 2009, p. 301).

The two possible reasons why similar-risk bonds are currently earning a return below the coupon interest rate on the Complex Systems bond are as follows: 1. The economic conditions have changed thus causing a shift in the basic cost of long-term funds.

2. There was a change in the firm’s risk.

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.

According to the below calculations, if the required return were at 12% instead of 10% the current value of Complex Systems’ bond would be $999.88. Bo = I x (PVIFAkd%,n) + M x (PVIFkd%,n) Bo = $120 (PVIFA12%,16) + M x (PVIF12%,16) Bo = $120 x (6.974) + $1,000 x (0.163) Bo = $836.88 + $163 Bo = $999.88 The return is equal to the coupon rate; therefore the bond value is equal to par value. Part “a” reveals the return is less than the coupon rate; therefore bond value is at a premium rate, or greater than par. Chapter 7: Problem 7-6 – Personal Finance Problem
Common stock valuation - Zero growth - Scotto Manufacturing is a mature firm in the machine tool component industry. The firm’s most recent common stock