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1- ) You want to have $3 million when you retire in 40 years. If you...

1- ) You want to have $3 million when you retire in 40 years. If you can earn 12% per year, how much do you need to deposit on a monthly basis if the first payment is made in one month? 2- ) What if the first payment is made today? 3- ) You are considering ABC’s preferred stock that is expected to pay a quarterly dividend of $1.00 forever. If your desired return is 10% per year, how much would you be willing to pay?

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Expert Solution

1)
Monthly deposit $ 255.00
Working:
a. Future Value of Annuity of 1 = (((1+i)^n)-1)/i Where,
= (((1+0.01)^480)-1)/0.01 i 12%/12 = 0.01
= 11764.773 n 40*12 = 480
b. Monthly Deposit = Future Value of Amount / Future Value of annuity of 1
= $       30,00,000 / 11764.773
= $             255.00
2)
Monthly deposit $ 252.47
Working:
a. Future Value of Annuity of 1 = ((((1+i)^n)-1)/i)*(1+i) Where,
= ((((1+0.01)^480)-1)/0.01)*(1+0.01) i 12%/12 = 0.01
= 11882.42024 n 40*12 = 480
b. Monthly Deposit = Future Value of Amount / Future Value of annuity of 1
= $       30,00,000 / 11882.420
= $             252.47
3)
Value of preferred stock $    40.00
Working:
Quarterly dividend $                  1.00
Quarterly Return 10%/4 = 0.025
Value of preferred stock = $                  1.00 / 0.025
= $                40.00
Amount that should be paid $    40.00

jeff jeffy answered 1 year ago
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