Dakota Gehue

A00469078
5125/24

This assignment includes 6 short-answer questions. Please clearly label your answers. Keep four decimals
in your middle calculation and TWO decimals in your final answer.

1. List two advantages and two disadvantages of the following forms of organization. List two similar
advantages will only receive points for one answer. (6 points)
a. Sole proprietorship
b. Limited partnership
c. Corporation

Advantages Disadvantages
sole I Easiest
.

organization to start-up with minimal ,

1 . Personally liable for business debts
, risking their
T
I rolcrietorship if business fails to
paperwork and costs.
personal assets meet financial
-

2 Has full authority over business decisions

.
.
obligations
.

. Limited funds
2 hindering potential growth
, compared to
other
organization forms.

Limited I Shielded from I Limited partners business

.

personal liability beyond their .

have minimal
say in

Partnership investment ,
safeguarding personal assets . decisions
a
management.
2 Collaboration . Conflicts between General
C Limited partners
amongst investors
combining
: &
. can

skills &
resources to improve business operations .
arise -

potential partnership dissolution

.

Corporation 1 Exist
. as
legal entities offering separation
,
I .
Must follow intricate
legal
t
regulatory frameworks ,

between personal business matters for

leading to admin burdens a
a
.
compliance challenges .

shareholders
. . Potential double-taxations
2 :
profits taxed at corporate
2 Easy capital increase stock a bond level and when distributed
.

through as dividends
.

issuance ,
potential growth
o
investments
.

2
Dakota Gehue

A00469078
5125/24

2. Stephanie just turns 30-year-old today. Her current annual salary is $50,000 and her annual salary
will grow at 3% every year until her retirement. She plans to save 10% of her annual salary each
year for her retirement and the first deposit starts today. She plans to retire when she turns 65-year-
old, and she wants to withdraw a constant amount every year from her retirement savings for
another 20 years (totally 20 payments). She will start to withdraw as soon as she turns 65. Given
the interest rate is constant at 10% compounded annually, at most how much she can withdraw Starts to
from her retirement savings every year? (5 points) withdrawl her
.
monthly amounts
PART A
:

63 64 45
33
---

- 30 3) 32
age · I I I I I I

310969 94
-

So Si Sz S3 ....
S S33 S34 .

0 10
So =
$50000 x .

So =
$5000 Written Calculations
:
Calculator Inputsi
first deposit
[(0-1) 11. 0 N 34
=

FV $5000
.

5000 ( 03) PMT = -5000

S
=
+ .

S,
3
$10150 I/y =

$310969 9355
=
S
FV =
310969 94
CPT FV
, - . = .

>

03)
-

5 + 5000(1
S
=
.

FV = $310969 94 .

Sc
=
$15454 .
5
-

$310969 94
worth approximately
investments will be
"
.

S2 5000(l 03) yearly

+
Stephanies at the age of 65
= .

Sy .

in 35 years when
she starts with drawing
Sy
=
2098
135 .
,

PARTB
:

Written Calculations
:

P 4mt =
$36526 4119 .

=> $36526 41 .

withdraw 20 annual payments of

Calculator Inputsi Stephanie can

$36526 41 from her retirement

N 20 20 yearly .
pints approximately
.

PV 310969 9355 funds for the next 20 years

Savings
=
.

8
Iy
=

FV
=
0
Prit =
-36526 4119 .

3
Dakota Gehue

A00469078
5125/24

3. John and Jane are twins. Jane invests $5,000 at age 20 and earns 5% EAR. John invests $10,000 at
- -

age 40 and earns 5% EAR. Assuming that John and Jane do not have any other savings, no matter
-

how long they live, John will never have as much money as Jane. Explain why?

Jane's Investment :
Calculator Inputs
:

Jane's investment amount

20

Flo
=
$5000 (1 05) .
N =
20 Pmt =
0
$13266 4885 when John decides to Iy 5 CPT FU 13266 4885
= = :
. .

=
FU20 =
$13266 49 .
invest .
PV =
5000
-

Jane's investment amount

20

FUyo FUzo (1 05) N 40 CPT FV 35199 9436

= = =
.
.

=
13266 . 49(1 05) . When her
+
John's Ily =
y
=
$35199 .
9436 investment when they PV =
-13266 4885
.

=
FUy0 $35199 9436 turn 40 years old
both . Prt =
=
.

John's Investment :

FU20
20
=
$10000 (1 05) .

=
$26532 .
977)

=>
FUzo $26532
=
.
98

Jane decides to invest

Since both Jane
&
John are twins ,
they're the same age .

40-years-old John decides to

$5000 at 20-years-old . When Janet John turn ,

invest $10000 , double what Jane invested ; however ,

Jane accumulated approximately
$13266 49 $5266 currently
$8266 . 49 ,
totalling . which is . 49 more than what John has

both turn 60-years-old Jane's investment will be worth approximately

. When
invested they ,

worth $26532 98 Since the twins the same

$35199 94 .

,
and Johns being .
.
are
earning
EAR (5 percent) Jane will always have ,
more money than John -

4
Dakota Gehue

A00469078
5125/24

4. You are planning to borrow $500,000 on a 20-year fully amortized mortgage. The interest rate is
8% compounded semi-annually. You choose the monthly payment.
a. What is the effective monthly rate for calculating the monthly payment? (1 point)
b. What is your monthly payment? (1 point)
c. How much will you owe the bank in the end of the 5th year. (1 point)
d. What fraction of the payment made at the end of the 12th year will represent repayment of
principal? (2 points)

DEAR [ it]
=
b) PV + =
20 12
.

Calculator Inputs :

t =
240 payments N =
240

$50000000)
=>
Ily
0 0016 =
k =
.
=
0 6558
.

K = 8 16 % . then ,
PV =
500000
=>
Prt =
$4141 7142 FV =
0

0816)
.

EmR =
(1 +
0 .
-

1 =
$
4141 71
.
CPT Prt = -

4147 7142
.

=
0 004558 .

=> EmR 0 6558 % 20-year amortized

My monthly payment my mortgage
=
.
on

is approximately $4141 71. .

The effective monthly

rate is 0 6550 % .

Year 5
O 2 .
3 ....
58 59
60
I 4

C) I
I I I I

payments 4141 71 .
4141 71
. 4141 71 . 4141 71... 4141 71
.
. 4141 71
.
4171 71
.

start at the

begin. Of ea . year.

Pmto
=
$4141 7142x60 .
I will owe the bank approximately $248502 85 .

$248502 852 at the end of the 5th year of my

mortgage.
=

=*
=>
Prtzo 248502 85 .

d) B =
Balance

Pret[-1)
*

B14s
=
PV(1 1) +
-

B143 1500000 (1 006550)/3-

71/
=> =
.
$4141 .

Fraction of Principal - Principal mt

500000 X 2 5465- 4141
71)
=

monthly pmt
. .

=
FOP
=>
Biuz
=
$296555 .
7319 oweb after the 143 pint .

FOP =
0 5304
.
x
100 =
53 04 %
.

,44
Interest
=

B143 *
~

$
296555 7319 0 006558
= x

Approximately 53 04 % of 12th payment

. .

=>
Interest , y =
1944 8125 interest on the 143rd
represents the repayment towards the principal
.

pint .

of the $500000.
mortgage loan being ,

5
Principal , yy =
Pmt-Interest
=
$4141 7142 .
-

$1944 8125 .

Principal,y
=>
2196 9071 paid towards principal
=

y
.

principal $500000
=
.
Dakota Gehue

A00469078
5125/24

5. Large jackpots in most U.S. lotteries are paid out in equal annual installments. The winner can also
request immediate payment, but in this case the jackpot is reduced and only the so-called “cash
value” is paid out. For the sake of simplicity, we will ignore the fact that lottery winnings are
considered taxable income in the United States. For example, in Connecticut, large jackpots are
paid out in 21 equal installments (with the first installment payable immediately when the winner
is confirmed) and the cash value is 57% of the total jackpot. So, if you happened to win $1,000,000
on Connecticut Lotto, you would receive $1,000,000/21 =$47,619.05 right now, another
$47,619.05 one year from now etc. until all 21 installments have been paid. Alternatively, you could
tell the Lotto administrator that you want to receive the cash value of $1,000,000 × 0.57 = $570,000
right now. Below you will find the number of annual installments and the cash value of two popular
U.S. lotteries:
Lottery Number of Annual Installments Cash Value
Connecticut Lotto 21 57%
Michigan Classic Lotto 47 30 50%

Suppose that the annual interest rate (EAR) is 8%, would you choose the installments or the cash value
if you won a million dollar on the Connecticut Lotto? How about the Michigan – Classic Lotto 47?
What is the difference (in terms of present value) between the annual installments and the cash values
of the two lotteries? (5 points)

Connecticut Latto Michigan Classic Latto 47

: :

PM $1000000 / So
PVannuity
PVanurity=
=

=
$375259 4444 .

$375259 44
Pannuity
*
.

$476990 .
6503 Present value of installments
.

$476990
P
Vannuity 65 Cash Value Annual Installments
=
.

Present value of installments $500000 > $375259 . 44

Cash Value Annual Installments

Calculater Inputs
$570000$476990 .
65
N =
30
Calculater Inputs
Iy
=
8
N =

21 PMT =
-33333 3333 .

I/y =
8 Fu =
0
FV =
0
CPTPU =
375259 4444.

PMT = -
47619 05 .

CPTPU =
476990 6503
Theres approximately $101731 21 difference between the PV of
.

installments and $10000 difference between the two latto's cash

,

values. Therefore I would choose the Connecticut Latto installments

6
and cash value
.
Dakota Gehue

A00469078
5125/24

6. You are the owner of 100 bonds issued by Lily Inc. These bonds have 8 years remaining to maturity,
an annual coupon payment of $80, and a par value of $1,000. Unfortunately, Lily Inc. is on the
brink of bankruptcy. The creditors, including yourself, have agreed to a postponement of the next
4 interest payments (otherwise, the next interest payment would have been due in one year). The
remaining interest payments, for year 5 through 8, will be made as scheduled. The postponed
payments will accrue interest at an annual rate of 6%, and they will then be paid as a lump sum at
maturity 8 years hence. The required rate of return on these bonds, considering their substantial
risk, is now 28%.
What is the present value of each bond (Price today)? (5 points)
Step One
:

8 I 2 3 4 - ↑ ↑ ↑
G
I 1 I I
'Present Value of

I↳
7

80(1 06) .
80(1 06)"
.
80(1 06)580(1 06)"
.
.

postponed pints .

-$120 .
2904

* $113 4153
.

Pump
I
441 8282.
# =
$441 83. .

sum
(1 +
0 . 20)8
=
$441 8282 .

. 2058
7

Pump
$
=
61 3156
.

sum

Step Two
:
Step Three :

G N =
3
N

=]
=

PVface
=0o
Prahit
Ily
=
28
PMT =
8
PMT -80 =

PVface =
$138 7779
.

Fu = -

1000
FV =
0
=
$246 06
=
$138 78
CPTPV 138 7779
.
. =

CPTPV =
246 0635
.
.

Step Four :

The present value (price today) of

PVBond PVLump PVfacevalve PVannuity each bond is approximately
=

sum

=
6) 3160 .
+
138 7779 .
+
246 0635
.

$446 16
. .

PVBond
=
$446 1574 .

=
$446 .
16