Two best friends, Natalie and Ann-Marie , who grew up together in the same neighborhood and

are the same age graduated from high school together.

At age 22, both friends started working at different companies but earning similar salaries.
Natalie started to save $50,000 at the beginning of each year [HJR1] at a rate of 15% for
retirement,
while Ann-Marie decided to "enjoy life". (Missed out on 8 years of Inv. unLike Natalie ie 8yrs late)
After 8 years the friends discussed their financial happenings over the period.
Their explanation for doing what they did with money was so convincing to the other.
Ann-Marie wanted to do more with her money, so she started investing the same $50,000 for
retirement at the same 15% until she retired at age 60

(8 yrs. after Natalie & Ann-marie’s age 22+8yrs later = 30 years old when she decided to begin,
so she has 30 years left to accomplish this, due to the retirement target @ age 60).

Natalie realized she was not having as much fun, so she decided to stop investing for just a
few years. (Stopped in vesting 8 years in)
However she never managed to invest another dollar toward her retirement at age 60.
Natalie did not touch her previous investment and it continued to earn interest over the next 30
years.
In your assessment who would have the higher retirement value at age 60, Natalie or Ann-
Marie?
Use the following to support your argument:

1. Calculate and state the value of Natalie's investment after 8 years.

2. Calculate and state the ladies' total retirement (each) value at age 60.

1. Calculate and state the value of Natalie's investment after 8 years. i.e., FV

i.e. FV of Natalies Investment After 8 years,

Natalie started to save $50,000 at the beginning of each year (Will indicate an
Annuity Due at a rate of 15%.
So we recall the FVA formula’
Answer:

PMT= $50,000.00
i %= 15% = 0.15
n = Number of years = 8yrs (Natalie’s = 8yrs of annuity due)
m=1 annually

Natalie 1st 8yrs of Annuity Due

FVA due =PMT * FVIFA (i/m, nm) * (1+i/m)

FVA=$50,000.00 * FVIFA (0.15/1, 8*1) * (1+0.15/1)
FVA=$50,000.00 * FVIFA (0.15/1, 8) * (1.15)
FVA=$50,000.00 * FVIFA (0.15, 8) * (1.15)
FVA=$50,000.00 * 13.7268 * 1.15
FVA=$50,000.00 *15.78582

FVA=$789,291 (What Natalie would have after the 5 years )

This will continue to grow for the next 30 years as the PV for the next FV formula

Natalie 30yr future value

nm
FVn = PV (1+i/m) or FV*FVIF (i/m, nm)
i = 15
n = 30
m=1

nm
FVn = PV (1+i/m) or FV*FVIF (i/m, nm)
30*1
FVn = 789,291 (1+.15/1) or FV*FVIF (i/m, nm)
30
FVn = 789,291 (1.15)

FVn = 789,291 *66.212

FVn = 52,260,535.692

2. Calculate and state the ladies' total retirement (each) value at age 60.
Would be natalies fv for the 8yrs + the same fv calculated for 30 yrs

i %= 15% = 0.15
n = Number of years =
Nat – n = 8yrs of annuity due, + 30yrs of compounding interest
Ann – n = 30yrs of annuity due
M =1 annually

Natalie 1st 8yrs of Annuity Due

FVA=PMT * FVIFA (i/m, nm) * (i+i/m) –

FVA=$50,000.00 * FVIFA (0.15/1, nm) * (i+i/m)

Natalie 30yr future value

nm
FVn = PV (1+i/m) = FV*FVIF (i/m, nm)
i = 15
n = 30
m=1

Answer:PMT= $50,000.00

I%= 15% = 0.15

N = Number of years

Natalie’s Retirement after 60 years

FV = PMT (1 + I)n

= $789,283.33 (1 + 0.15)30

= $789,283.33 (1.15)30

= $789,283.33 (66.21177196)

= $52,259,847.86

Ann-Marie’s Retirement after 60 years

FVAD = PMT (1 + I)n-1) (1+I)

I
 = $50,000 (1 + 0.15)31 - 1) (1 + 0.15)

0.15

= $50,000 (1.15)31 - 1)(1.15)

0.15

= $50,000 (76.144 - 1)(1.15)

0.15

= $50,000 (75.144) (1.15)

0.15

= $50,000 (500.96)(1.15)

= $25,048(1.15)

= $28,805,200

Based on the calculations above it is shown that even though Natalie stopped making her
deposits after 8 years her money kept working for her which gave her a higher return on her
investment than her friend Ann-Marie who chose to start later.

12a. Lollywog Corporation has issued a bond that has a 10% coupon rate, payable semi-
annually.

The bonds mature in 7 years, have a face value of $1,000 and a yield to maturity of
12%.

What is the price of the bond? (5 marks)

ANSWER (a)

m=1

n=7

i% =12%

coupon rate = 10%

Principal = $1,000.00

coupon = coupon rate x principal / m = $142.85.00

Vb = $I (PVIFA i, n) + $M (PVIF i, n)

Vb = $100 (PVIFA 12, 7) + $1000 (PVIF 12, 7)

= 100 * 4.5638 + 1,000 * 0.4523

= 456.38 + 452.3

= 908.68

b. A company has current liabilities of $500 million, and its current ratio is 2.0.

(i) What is the total of its current assets?

Current ratio = CA/CL

2.0 = CA/500,000,000

CA=2.0 * 500,000,000

CA=1,000,000,000 (1Billion)

(ii) If this firm’s quick ratio is 1.6, how much inventory does it have?

QUICK RATIO = (CA-INV)/CL

1.6= (1,000,000,000 – INV)/ 500,000,000

INV = $ 1,000,000,000 – (1.6 * 500,000,000) = 200,000,000

(iii) The stock of Company X sells for $23.06 and its EPS is $2.35.

The industry average P/E ratio is 11.3x.

Calculate the P/E ratio for Company X and comment on its growth prospects. (2 + 3
marks)

ANS.

P/E = Share price/Earnings per share

PE = 23.06/2.35 = 9.81 Company X’s PE Ratio

Compared to the Industry AVG 11.3x Company X is trading at around nine times earnings. If
they increase the share price and lower the earnings Per share, they will be able to grow at a
better pace.

[HJR1]annuity due