Part 1: Essay
Describe the financial crisis of 2007- 2009. What were the primary causes of this financial crisis?
1. Ira Schwab opens up a Schwab IRA and places $2,000 in his retirement account at the beginning of each year for 10 years. He believes the account will earn 5 percent interest per year, compounded quarterly. How much will he have in his retirement account in 10 years?
2. The city of Glendale borrows $48 million by issuing municipal bonds to help build the Arizona Cardinals football stadium. It plans to set up a sinking fund that will repay the loan at the end of 10 years. Assume a 4 percent interest rate per year. What should the city place into the fund at the end of each year to have $48 million in the account to pay back their bondholders?
Matthew is considering several possible compensation alternatives for services he has provided as a consultant:
Option A: Matthew could receive $8,000 today.
Option B: Matthew could receive $2,500 at the end of each of the next four years.
Option C: Matthew could receive $12,000 five years from now.
1. Calculate the present value for each option assuming that Matthew can earn 7 percent on any investment funds.
2. Which option results in the greatest financial benefit to Matthew?
3. If Matthew earns 10 percent, will that change your answer to # 2 above? Please explain.
Tom and Mary James just had a baby. They heard that the cost of providing a college education for this baby will be $100,000 in 18 years. Tom normally receives a Christmas bonus of $4,000 every year in the paycheck prior to Christmas. He read that a good stock mutual fund should pay him an average of 10 percent per year. Tom and Mary want to make sure their son has $100,000 for college. Consider each of the following questions.
a. How much does Tom have to invest in this mutual fund at the end of each year to have $100,000 in 18 years?
b. Tom’s father said he would provide for his grandson’s education. He puts $10,000 in a government bond that pays 3 percent interest. His dad said this should be enough. Do you agree?
c. If Mary has a savings account worth $50,000, how much must she withdraw from savings and set aside in this mutual fund to have the $100,000 for her son’s education in 18 years?
Part 5: Essay
Some suggest that a firm should seek to maximize the welfare of all its stakeholders, such as employees, customers and the community in which it operates. How would this objective conflict with the one of maximizing shareholder value? Do you believe such an objective is feasible?
Joe Downey is currently 65 years of age. He is currently drawing $20,000 a year out of his IRA. He expects to live to 100 and wants to know what he needs now to insure himself that he will be able to draw the $20,000 at the beginning of each year for the next 35 years. He believes the account will earn 6 percent compounded annually for the next 35 years. How much money does he need in his account today?
Growth Enterprises believes its latest project, which will cost $80,000 to install, will generate a perpetual growth stream of cash flows. Cash flow at the end of the first year will be $5,000, and cash flows in future years are expected to grow indefinitely at an annual rate of 5 percent.
A. If the discount rate for this project is 10%, what is the project NPV?
B. What is the project IRR?
ac5230 problem set 1 summer 1 2015.doc