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33. Real Cash Flows When Marilyn Monroe died, ex-husband Joe DiMaggio vowed to place fresh flowers on her grave every Sunday as long as he
33. Real Cash Flows When Marilyn Monroe died, ex-husband Joe DiMaggio vowed to place fresh flowers on her grave every Sunday as long as he lived. The week after she died in 1962, a bunch of fresh flowers that the former baseball player thought appropriate for the star cost about $7. Based on actuarial tables, "Joltin' Joe" could expect to live for 30 years after the actress died. Assume that the EAR is 6.8 percent. Also, assume that the price of the flowers will increase at 3.5 percent per year, when expressed as an EAR. Assuming that each year has exactly 52 weeks, what is the present value of this commitment? Joe began purchasing flowers the week after Marilyn died. 34. Real Cash Flows You are planning to save for retirement over the next 30 years. To save for retirement, you will invest $700 per month in a stock account in real dollars and $300 per month in a bond account in real dollars. The effective annual return of the stock account is expected to be 11 percent, and the bond account will earn 7 percent. When you retire, you will combine your money into an account with an effective reharn of 9 percent. The returns are stated in nominal terms. The inflation rate over this period is expected to be 4 percent. How much can you withdraw each month from your account in real terms assuming a 25-year withdrawal period? What is the nominal dollar amount of your last withdrawal? 35. Real Cash Flows Paul Adams owns a health club in downtown Los Angeles. He charges his customers an annual fee of $500 and has an existing customer base of 720 . Paul plans to raise the annual fee by 5 percent every year and expects the clab membership to grow at a constant rate of 3 percent for the next five years. The overall expenses of running the health club are $145,000 a year and are expected to grow at the inflation rate of 2 percent annually. After five years, Paul plans to buy a laxury boat for $500,000, close the health club, and travel the world in his boat for the rest of his life. What is the annual amount that Paul can spend while on his world tour if he will have no money left in the bank when he dies? Assume Paul has a remaining life of 25 years after he retires and earns 9 percent on his savings. 32. Treasury Bonds The following Treasury bond quote appeared in The Walt Street Joumat on May 11, 2004: Why would anyone buy this Treasury bond with a negative yield to maturity? How is this possible
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