 # Essays on Introductory Finance Essay

Question oneYear that remain before retirement – 30 yearsEstimated years to be spend in retirement- 27 yearsHousehold expenditure per annum- \$84,000Expenditure in years of retirement = 80% of \$ 84000 = \$67,200Expected expenditure before retirement = \$ (84,000×30) = \$2,520, 000Expenditure in retirement = \$ (67,200×27) = \$1,814,400Required amount in retirement = expenditure less available amount = (67,200-53,000) = \$14,200\$14,200 discounted for twenty seven years will be as follows: \$14,200 = n (1÷1.10)2714,200 = n ×0.07628N = 14,200 ÷ 0.07628N = \$186, 162This will be the amount that has to be raised in thirty years during the active service before retirement.

To get the amount needed in one year will be all follows: \$ (186,162 ÷30)\$6,205.4 \$6205.4 = n (1÷1.08)306205.4 = n ×0.09938N = 6205.4 ÷ 0.09938N = \$62,441Amount to be saved = 62,441 ÷30 = \$2081.4 (Fabozzi, 2001). Question twoGovernment bonds increased from 4% to 7%. This occurred amid fears that Greece was not capable of paying the debts owed by her. In 2009, a 10-year bond paying 4% coupon semi-annually. After six months preceding the first coupon payment, invested adjusted their interest to 7%.

PB = ∑ C/ (1+i) t + Po/ (1+r) TBond Price = C × (1-(1/ (1+I) n + M/ (1+i) nThe bond is being paid semi-annually hence the maturity period will be 10×2 = 20Coupon is 4% paid semi-annually (Solomon, 2007). Let as assume that C is \$800 while Po is \$1000When the interest rate is: 800/(1+0.04)1 + 1000/(1+0.04)20 = (800 ÷1.04) + 1000/(1.04)20 = 769.2 + 456.4 = \$1225.6When the interest changes to 7% the calculations will be as follows: PB = ∑ C/ (1+i) t + Po/ (1+r) TPB = 800/ (1+0.07)1 + 1000/ (1+0.07)1 = (800÷1.07) + (1000 ÷1.0720) = 747.7+258.4 = \$1006.1It can be noted that increase in the interest rate leads to decrease in the price of the bond.

When the interest is at 4% the bond value is \$1225.6, when the interest increase to 7% the value decreases to \$1006. The value of the bond and the interest are inversely related (Veronesi, 2010). Question threeThere will be increase in dividend value for three consecutive years prior to the growth. The increase will be 20% each year. Increase in dividend per share in the first year will be as follows: 100% represents \$2120% will represent (120/100) ×2 = \$ 2.4Increase in dividend per share in the second year will be as follows: 100% represents \$2.4120% will represent (120/100) ×2.4 = \$2.88Increase in dividend per share in the third year will be as follows: 100% represents \$ 2.88120% will be represented by (120/100) × \$2.88 = \$3.456To calculate the new value of share keeping in mind that the dividend growth will be 5% per year, the following criterion will be followed: The factors needed in calculation of the share value are as follows: Do –Dividend = \$3.456g- Growth rate = 5%r- Required rate of return = 14% The dividend will increase by 5% per annum indefinitely.

This is the growth rate of the shares. Value of stock = Do (1+g) ÷(r-g)= 3.456 (1+0.05) ÷ (0.14 – 0.05)= 3.456 (1.05) ÷ (0.09)= 3.6288 ÷ 0.09= 40.32= \$40.32 = (\$40.32 being value of the stock). The value of stock after growth of 5% of stock indefinitely will be \$40.32 (Madura, 2009). Question 4Part AThe first investment will earn compound interest in a period of fifteen years.

The interest rate to be applied is six percent. The length of time will be accumulative fifteen years. The workout of the solution will be as follows: Fv = p (1+r) nFuture value = 2750(1.06)15 = 2750 ×2.396558193 = \$6590.545 =\$6590.5The amount realized at the end of the fifteen years will be \$6590.5. Part Byear additional investment amount at the beginning Interest Interest amount total 109000.09819812100019810.09178.292159.29312003359.290.09302.33613661.6261415005161.62610.09464.5463495626.172449518007426.1724490.09668.35552048094.527969Part C Alexander can invest the 1200 at the end of the year to earn a 10 percent.

The amount at the end of ten years can be calculated as provided in the table below.