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Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250

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BuyFindarrow_forward

Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250
Textbook Problem

REACHING A FINANCIAL GOAL Allison and Leslie, who are twins, just received $10,000 each for their 25th birthday. They both have aspirations to become millionaires. Each plans to make a $5,000 annual contribution to her “early retirement fund” on her birthday, beginning a year from today. Allison opened an account with the Safety First Bond Fund, a mutual fund that invests in high-quality bonds whose investors have earned 8% per year in the past. Leslie invested in the New Issue Bio-Tech Fund, which invests in small, newly issued bio-tech stocks and whose investors have earned an average of 13% per year in the fund’s relatively short history.

  1. a. If the two women’s funds earn the same returns in the future as in the past, how old will each be when she becomes a millionaire?
  2. b. Flow large would Allison’s annual contributions have to be for her to become a millionaire at the same age as Leslie, assuming their expected returns are realized?
  3. c. Is it rational or irrational for Allison to invest in the bond fund rather than in stocks?

a.

Summary Introduction

To calculate: Number of years taken by Person A and Person L to become millionaires if both earn the same return.

Financial Goal:

Financial goal is a money based target which a person wants to achieve by the certain age. It requires making plan for reducing debt, creating enough wealth to have at the time of retirement and reducing the amount of tax.

Explanation

Given for Person A,

Rate of return is 8%.

Present value of investment is $10,000.

Annual savings is $5,000.

The “NPER” formula is to be used in excel to get the number of years.

Table (1)

Number of years Person A required to become a millionaire is 34.885 years which means that she will be millionaire by the age of 59.885 years (25+34.885) .

Given for Person L,

Rate of return is 13%

b.

Summary Introduction

To calculate: Person A’s contribution to become millionaire at the same age of Person L.

Financial Goal:

Financial goal is a money based target which a person wants to achieve by the certain age. It requires making plan for reducing debt, creating enough wealth to have at the time of retirement and reducing the amount of tax.

c.

Summary Introduction

To explain: Whether it is rational or irrational for Person A to invest in the bond fund rather than in stocks.

Financial Goal:

Financial goal is a money based target which a person wants to achieve by the certain age. It requires making plan for reducing debt, creating enough wealth to have at the time of retirement and reducing the amount of tax.

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