1.1 Stefani German, a 40-year-old woman, plans to retire at age 65, and she want

1.1 Stefani German, a 40-year-old woman, plans to retire at age 65, and she wants to accumulate $500,000 over the next 25 years to supplement the retirement programs provided by the federal government and her employer. She expects to earn an average annual return of about 5% by investing in a low-risk portfolio containing about 20% short-term securities, 30% common stock, and 50% bonds.
Stefani currently has $44,300 that at a 5% annual rate of return will grow to about $150,000 by her 65th birthday. (The $150,000 figure is found using time value of money techniques, Chapter 4 appendix.) Stefani consults a financial advisor to determine how much money she should save each year to meet her retirement savings objective. The advisor tells Stefani that if she saves about $20.95 each year, she will accumulate $1,000 by age 65. Saving five times that amount each year, $104.75, allows Stefani to accumulate roughly $5,000 by age 65.
1. How much additional money does Stefani need to accumulate over time to reach her goal of $500,000?
2. How much must Stefani save to accumulate the sum calculated in part a over the next 25 years?
1.3 Jason and Kerri Consalvo, both in their 50s, have $50,000 to invest and plan to retire in 10 years. They are considering two investments. The first is a utility company common stock that costs $50 per share and pays dividends of $2 per share per year. Note that these dividends will be taxed at the same rates that apply to long-term capital gains. The Consalvos do not expect the value of this stock to increase. The other investment under consideration is a highly rated corporate bond that currently sells for $1,000 and pays annual interest at a rate of 5%, or $50 per $1,000 invested. After 10 years, these bonds will be repaid at par, or $1,000 per $1,000 invested. Assume that the Consalvos keep the income from their investments but do not reinvest it (they keep the cash in a non-interest-bearing bank account). They will, however, need to pay income taxes on their investment income. If they buy the stock, they will sell it after 10 years. If they buy the bonds, in 10 years they will get back the amount they invested. The Consalvos are in the 32% tax bracket.
1. How many shares of the stock can the Consalvos buy?
2. How much will they receive after taxes each year in dividend income if they buy the stock?
3. What is the total amount they would have from their original $50,000 if they purchased the stock and all went as planned?
4. How much will they receive after taxes each year in interest if they purchase the bonds?
5. What is the total amount they would have from their original $50,000 if t
1.5 Kim and Kanye have been dating for years and are now thinking about getting married. As a financially sophisticated couple, they want to think through the tax implications of their potential union.
1. Suppose Kim and Kanye both earn $70,000 (so their combined income is $140,000). Using the tax bracket information in Table 1.2 (or the Excel file available on MyLab Finance with the same information), calculate the combined tax bill that they would pay if they remain single, and compare that to the taxes they would pay if they were married and filed a joint return.
2. Now suppose that Kim and Kanye both earn $400,000 (so their combined income is $800,000). Calculate the combined tax bill that they would pay if they remain single, and compare that to the taxes that they would pay if they were married and filed a joint return.
3. What differences do you find in parts (a) and (b)? What is the cause of these differences?
2.2 On April 13, 2017, Yext Inc. completed its IPO on the NYSE. Yext sold 10,500,000 shares of stock at an offer price of $11 per share. Yext’s closing stock price on the first day of trading on the secondary market was $13.41.
1. Calculate the gross proceeds for Yext’s IPO.
2. Calculate Yext’s IPO underpricing.
3. Calculate the money left on the table for Yext’s IPO.
2.6 In late December you decide, for tax purposes, to sell a losing position that you hold in Twitter, which is listed on the NYSE, so that you can capture the loss and use it to offset some capital gains, thus minimizing your tax liability for the current year. However, since you still believe that Twitter is a good long-term investment, you wish to buy back your position in February the following year. To get this done you call your Charles Schwab brokerage account manager and request that he immediately sell your 1,200 shares of Twitter and then in early February buy them back. Charles Schwab charges a commission of $4.95 for online stock trades, and for broker-assisted trades there is an additional $25 service charge, so the total commission is $29.95.
1. Suppose that your total transaction costs for selling the 1,200 shares of Twitter in December were $59.95. What was the bid/ask spread for Twitter at the time your trade was executed?
2. Given that Twitter is listed on the NYSE, do your total transaction costs for December seem reasonable? Explain why or why not.
3. When your February statement arrives in the mail, you see that your total transaction costs for buying the 1,200 shares of Twitter were $47.95. What was the bid/ask spread for Twitter at the time your trade was executed?
4. What are your total round-trip transaction costs for both selling and buying the shares, and what could you have done differently to reduce the total costs?
2.9 In each of the following cases, calculate the price of one share of the foreign stock measured in U.S. dollars (US$).
1. A Belgian stock priced at 103.2 euros (€) when the exchange rate is 1.0753$/€ (i.e., each euro is worth $1.0753).
2. A Swiss stock priced at 93.3 Swiss francs (Sf) when the exchange rate is 1.0417$/Sf.
3. A Japanese stock priced at 1,350 yen (¥) when the exchange rate is 110¥/$.
2.12 An investor believes that the U.S. dollar will rise in value relative to the Japanese yen. The same investor is considering two investments with identical risk and return characteristics. One is a stock trading in yen in Japan and the other is a stock trading in dollars in the United States. Should the investor purchase the Japanese stock?
2.16 Assume that an investor buys 100 shares of stock at $35 per share, putting up a 75% margin.
1. What is the debit balance in this transaction?
2. How much equity funds must the investor provide to make this margin transaction?
3. If the stock rises to $55 per share, what is the investor’s new margin position?