part 3 4 5 8. Valuing human capital with wage growth: To make the calculation of the present discounted value of aworker's human capital more realistic, suppose labor income starts at $50,000 initially, but then grows at aconstant rate of 2% per year after that. Let w, be labor income in year t, so thatw; = Wo(1 +',where wo = $50,000 and g= 0.02. The steps below will walk you through the problem.1. If the interest rate is R, what is the formula for the present discounted value today (in year 0) of laborincome from a particular future year t?2. Now add up these terms from t = 0 to = 45 to get a formula for the present discounted value of laborincome. Your answer should look something like that in equation (7.12).3. Write your answer to part (b) so that it takes the form of the geometric series:pdv = w.(1 + a + a? + a³ + .+ at5).What is the value of a that you find?4. Apply the geometric series formula to compute the present discounted value for the case of R= 0.04, R= 0.03, and R = 0.02. What weird thing happens (and why) when R = 0.02?5. Comment on your results.

Labor income = $50,000 Rate of return = 2% per year Let wt be labor income in year t, so that…

3. Write your answer to part (b) so that it takes the form of the geometric series: pdv = w,(1+ a + a? +a? +. + a5). ... What is the value of a that you find? 4. Apply the geometric series formula to compute the present discounted value for the case of R = 0.04, R = 0.03, and R= 0.02. What weird thing happens (and why) when R= 0.02? 5. Comment on your results.

3. Write your answer to part (b) so that it takes the form of the geometric series: pdv = w,(1+ a + a? +a? +. + a5). ... What is the value of a that you find? 4. Apply the geometric series formula to compute the present discounted value for the case of R = 0.04, R = 0.03, and R= 0.02. What weird thing happens (and why) when R= 0.02? 5. Comment on your results.

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter14: Capital Structure Management In Practice

Section: Chapter Questions

Problem 28P

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