FUNDAMENTALS OF CORP.FIN.(LL)-W/CONNECT
FUNDAMENTALS OF CORP.FIN.(LL)-W/CONNECT
10th Edition
ISBN: 9781260848670
Author: BREALEY
Publisher: MCG
Question
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Chapter 5, Problem 72QP

a)

Summary Introduction

To determine: The amount that to accumulate by the time of retirement.

a)

Expert Solution
Check Mark

Explanation of Solution

Computation of present value is as follows:

PV=C×[1i1i(1+i)n]=$30,000×[10.1010.10(1.10)15]=$30,000×7.6061=$228,183

Therefore, the present value is $228,183.

b)

Summary Introduction

To determine: The savings amount required per year to finance the retirement consumption.

b)

Expert Solution
Check Mark

Explanation of Solution

Computation of savings amount required per year to finance the retirement consumption is as follows:

PV of the retirement goal=PV(1+i)n=$228,183(1.10)30=$13,076.8

The present value of the savings of 30 year stream will be same as this present value, therefore:

C×[10.1010.10×(1.10)30]=$13,076.80Therefore, the value of C isC=PMT=$1,387.18

Therefore, the required annual savings is $1,387.18.

c)

Summary Introduction

To determine: The cost of loaf of bread at the time of retirement.

c)

Expert Solution
Check Mark

Explanation of Solution

Computation of cost of loaf of bread at the time of retirement is as follows:

Future value = pv×(1+r)n=$1×(1.04)30=$3.24

Therefore, the cost of loaf of bread at the time of retirement is $3.24.

d)

Summary Introduction

To determine: The real amount of saving.

d)

Expert Solution
Check Mark

Explanation of Solution

Computation of real amount of saving is as follows:

Real interest rate = (1+nominal interest rate)(1+inflation rate)1=1.101.041=0.0577or  5.77%

Retirement goal in real terms= C×[1i1i(1+i)]=$30,000×[10.057710.0577×(1.0577)15]=$295,796.61

Therefore, the real amount of saving is $295,796.61.

e)

Summary Introduction

To determine: The predetermined real annual savings.

e)

Expert Solution
Check Mark

Explanation of Solution

Computation of predetermined real annual savings is as follows:

The future value of your 30-years savings stream must equal to $295,796.61. Then we solve for (PMT) in the following equation:

C×[1.05773010.0577]=$295,796.61therefore the value of CC=PMT=$3,895.66

The savings amount is comparatively higher than in the alternate situation because the rate at which purchasing power grows is less than the nominal interest rate, 10%.

f)

Summary Introduction

To determine: The nominal value of saving.

f)

Expert Solution
Check Mark

Explanation of Solution

Computation of nominal value of saving is as follows:

If the real amount saved is $3,895.66 and prices rise at 4% per year, then the amount saved at the end of 1 year, in nominal terms it will be $4,051.49($3,895.66×1.04).

f)

Summary Introduction

To determine: The nominal value of saving in the 30th year.

f)

Expert Solution
Check Mark

Explanation of Solution

Computation of nominal value of saving in the 30th year is as follows:

The 30th year will require nominal savings of $12,635.17($3,895.66×(1.04)30).

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Chapter 5 Solutions

FUNDAMENTALS OF CORP.FIN.(LL)-W/CONNECT

Ch. 5 - Prob. 11QPCh. 5 - Present Values. Compute the present value of a...Ch. 5 - Present Values. You will require $700 in 5 years....Ch. 5 - Prob. 14QPCh. 5 - Prob. 15QPCh. 5 - Prob. 16QPCh. 5 - Calculating the Interest Rate. A U.S. Treasury...Ch. 5 - Prob. 18QPCh. 5 - Prob. 19QPCh. 5 - Prob. 20QPCh. 5 - Prob. 21QPCh. 5 - Perpetuities. A local bank advertises the...Ch. 5 - Prob. 23QPCh. 5 - Prob. 24QPCh. 5 - Perpetuities. British government 4% perpetuities...Ch. 5 - Prob. 26QPCh. 5 - Prob. 27QPCh. 5 - Prob. 28QPCh. 5 - Annuities. You can buy a car that is advertised...Ch. 5 - Prob. 30QPCh. 5 - Future Value of Annuities. I now have $20,000 in...Ch. 5 - Prob. 32QPCh. 5 - Prob. 33QPCh. 5 - Prob. 34QPCh. 5 - Annuity Due. Recall that an annuity due is like an...Ch. 5 - Prob. 36QPCh. 5 - Prob. 37QPCh. 5 - Annuity Due. The $40 million lottery payment that...Ch. 5 - Prob. 39QPCh. 5 - Prob. 40QPCh. 5 - Retirement Savings. A couple will retire in 50...Ch. 5 - Retirement Savings. You believe you will need to...Ch. 5 - Prob. 43QPCh. 5 - Retirement Savings. You believe you will spend...Ch. 5 - Retirement Savings. A couple thinking about...Ch. 5 - Perpetuities and Effective Interest Rate. What is...Ch. 5 - Amortizing Loans and Inflation. Suppose you take...Ch. 5 - Mortgage with Points. Home loans often involve...Ch. 5 - Prob. 49QPCh. 5 - Effective Interest Rate. You’ve borrowed $4,248.68...Ch. 5 - Prob. 51QPCh. 5 - Effective Interest Rate. If a bank pays 6%...Ch. 5 - Effective Interest Rate. In a discount interest...Ch. 5 - Effective Interest Rate. Banks sometimes quote...Ch. 5 - Prob. 55QPCh. 5 - Prob. 56QPCh. 5 - Prob. 57QPCh. 5 - Prob. 58QPCh. 5 - Effective Interest Rate. Find the effective annual...Ch. 5 - Prob. 60QPCh. 5 - Prob. 61QPCh. 5 - Prob. 62QPCh. 5 - Effective Interest Rate. If you take out an $8,000...Ch. 5 - Real versus Nominal Perpetuities. If the interest...Ch. 5 - Real versus Nominal Dollars. An engineer in 1950...Ch. 5 - Real versus Nominal Dollars. Your consulting firm...Ch. 5 - Real versus Nominal Rates. If investors are to...Ch. 5 - Real versus Nominal Rates. If investors receive a...Ch. 5 - Real versus Nominal Annuities. Good news: You will...Ch. 5 - Prob. 71QPCh. 5 - Prob. 72QPCh. 5 - Retirement and Inflation. A couple will retire in...Ch. 5 - Real versus Nominal Rates. You will receive $100...
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