Part 2 Integrative Data Case This case draws on material from Chapters 3-7. Adam has just graduated, and has a good job at a decent starting salary. He hopes to purchase his first new car. The car that Adam is considering costs $47,000. The dealer has given him three payment options: 1. Zero percent financing. Make a $4,100 down payment from his savings and finance the remainder with a 0% APR loan for 60 7 months. Adam has more than enough cash for the down payment, thanks to generous graduation gifts. 82. Rebate with no money down. Receive a $4,400 rebate from the car dealer and finance the rest with a standard 60-month loan, with an 6.00% APR. He likes this option, as he could think of many other uses for the $4,100 of his saving. 10 3. Pay cash. Get the $4,400 rebate and pay the rest with cash. While Adam doesn't have balance of the car cost in hand, he 11 wants to evaluate this option. His parents always paid cash when they bought a family car; Adam wonders if this really was a good 12 idea. 13 14 Adam's fellow graduate, Jenna, has been tryig to decide how much of her new salary she could save for retirement. Jenna is considering 15 putting $5,000 of her annual savings in a stock fund. She just turned 22 and has a long way to go until retirement at age 60, and she considers 16 this risk level reasonable. The fund she is looking at has earned an average of 6.00% over the past 15 years and could be expected to continue 17 eaming this amount, on average. While she has no current retirement savings, five years ago Jenna's grandparents gave her a new 30-year U.S. 18 Treasury bond with a $25,00 face value with 2.5% semiannual coupons. 19 Jenna wants to know her retirement income if she both (1) sells her Treasury bond at its current market value and invests the proceeds in the stock fund and (2) saves 20 an additional $5,000 at the end of each year in the stock fund from now until she retires. Once she retires, Jenna wants those savings to last until she is 93. 21 22 23 Case Questions 24 1. 25 2. What are the cash flows associated with each of Adam's three car financing options? Suppose that, similar to his parents, Adam had plenty of cash in the bank so that he could easily afford to pay cash for the car without running into debt now 26 or in the foreseeable future. If his cash earns interest at a 1.50% APR (based on monthly compounding) at the bank, what would be his best purchase option for the 27 car? 28 3. In fact, Adam doesn't have sufficient cash to cover all his debts including his (substantial) student loans. The loans have a 12.5% APR, and any money 29 spent on the car could not be used to pay down the loans. What is the best option for Adam now? (Hint: Note that having an extra $1 today saves Adam roughly 30 $1.125 next year because he can pay down the student loans. So, 12% is Adam's time value of money in this case.) structions Adam-Questions 1-4 Jenna - Questions 5-9 Suppose that, sumar to mis parents, Aunum or prenty Of CR 26 or in the foreseeable future. If his cash carns interest at a 1.50% APR (based on monthly compounding) at the bank, what would be his best purchase option for the 27 car? 3. In fact, Adam doesn't have sufficient cash to cover all his debts including his (substantial) student loans. The loans have a 12.5% APR, and any money 29 spent on the car could not be used to pay down the loans. What is the best option for Adam now? (Hint: Note that having an extra $1 today saves Adam roughly 30 $1.125 next year because he can pay down the student loans. So, 12% is Adam's time value of money in this case.) 4. Suppose instead Adam has a lot of credit card debt, with an 26.25% APR, and he doubts he will pay off this debt completely before he pays off the car. 32 What is Adam's best option now? (Hint: See Hint on #3 above) 33 5. Suppose Jenna's Treasury bond has a coupon interest rate of 2.5%, paid semiannually, while current Treasury bonds with the same maturity date have a 34 yield to maturity of 3.50% (expressed as an APR with semiannual compounding). If she has just received the bond's 10th coupon, what is the value of Jenna's as Treasury Bond today? 6. Suppose Jenna sells the bond, reinvests the proceeds, and then saves as she planned. If, indeed, Jenna earns a 6.00% annual return on her savings, how 37 much could she withdraw each year in retirement? (Assume she begins withdrawing the money from the account in equal amounts at the end of each year once her retirement begins.) 7. Jenna expects her salary to grow regularly. While there are no guarantees, she believes an increase of 3.25% a year is reasonable. She plans to save $5,000 the first year, and then increase the amount she saves by the amount of her annual salary increase. Unfortunately, prices will also grow due to inflation. Suppose Jenna assumes there will be 3% inflation every year. In retirement, she will need to increase her withdrawals each year to keep up with inflation. a How much money will Jenna have at her retirement? b. How much can she withdraw at the end of the first year of her retirement in today's dollars? Hint: Value Jenna's Retirement Fund at Retirement Age FV of Treasury Bond + FV of Jenna's Savings 9. 8. Should Jenna sell her Treasury bond and invest the proceeds in the stock fund? Give at least one reason for and against this plan. At the last minute, Jenna considers investing in Coca-Cola stock at a price of $63.99 per share instead. The stock just paid an annual dividend of $1.76 and she expects the dividend to grow at 2.00% annually. If the next dividend is due in one year, what expected return is Coca-Cola stock offering? 54 56 57 instructions Adam Questions 1-4 Jenna Questions 5-9 + 14 D7 Open recover xvfx D Adam's car purchase Car cost $47,000 Loan Term in months 60 Option 1 Down Payment $4,100 Option 2 and 3 Rebate $4,400 Option 2 Loan rate 6.00% Deposit Interest Rates Student Loan Rate 12.50% Credit Card Interest Rate 26.25% Question 1 (12 p Option 1-Zere percent financing Option 2 Rebate w/ 50 down Option 3-Pay cash Down Payment $4,100.00 $4,400.00 $4,400 00 17 MONTHLY CASH FLOWS Cash flow for Month O 18 19 20 21 Option 1-Zero percent financing Option 2-Rebate w/50 down OptionPay cash $4,700.00 $41,000.00 22 23 24 Question 2 (12 25 Option 1 Option 2 Option3 Down Payment G NOTE: Use this information to solve the data case in addition to other ne Amount Financed Interest Rate (APR) Loan Term (months) $42,900.00 $42,600.00 0% 6.00% 60 Monthly Payment $715.00 60 5825.74 47,600 00 Cash flows for Month 1 to End of Term $36.900.00 $47,66000 APR 0.00% 6.00%) PV of Car Financing Deposit APR Which option should be select? Option 70% Down Payment APR Question 3 (12 PV of Car Financing Student Loan APR Option 1 Option 2 Option 3 PV of Car Financing at Down Payment APR Credit Card APR Question 4 (12 pts) Option 2 Instructions Option 2 Option 3 Adam Questions 1-4 Jenna-Questions 5-9 + Ready Accessibility: Investigate Which option should he select? Option 70% apr to use the cash to pay his student loans Which option should he select? Option? 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 Jenna's retirement income if she sells her T-bonds with face value identified below and invests the proceeds in the stock market at a return identified B in a stock fund until retirement. Jenna wants those retirement savings to last to the age specified in the data table below. Y-Bond Face Value Coupon Rate Remaining Term on T-Bond in years Current YTM Jenna's current age Desired retirement age Planned life expectancy (age in years) Annual Investment in stock fund Annual Return on Stock Fund Jenna's expected annual salary increases for Q7 Inflation Rate for Q7 Current Coca-Cola Stock Price for Q9 Coca-Cola Annual Dividend (just paid) Cocal-Cola Expected Dividend Growth NOTE: Use this information to solve the data case in addition to othe 25 Question 5 (12 pts) 26 27 28 29 30 31 32 33 34 35 What is the value today of the Treasury Bond? T-Bond Face Value Coupon Rate Semiannual Pmt Remaining Term (years) Current YTM PV 36 Question 6 (12 pts): 37 38 39 40 42 Initial Investment-Treasury Bond PV Annual Investment in stock fund Number of years Jenna saves money (years) Number of years of withdrawal (years) Return on stock fund (r, %) Step 1: FV of saving from age 22-60 Step 2 Annual withdrawal amount beginning age 61 Hint: Step 1: Find how much money will Jenna save by the time she retires. Step 2: Once you know how much Jenna saves by retirement, this will become Jenna's PV at that age. Find payment (withdrawal) Jenna gets each year in retirement 46 Question 7 (12 pts): Step 1: Find Cash flow for Jenna from now until retirement Time Period Cash Flow Return on stock fund (r, %) uestions 1:4 Jenna Questions 5-9 + 2 30 32 Remaining Term (years) Current YTM [PV 36 Question 6 (12 pts): Initial Investment Treasury Bond PV Annual Investment in stock fund Number of years Jenna saves money (years) Number of years of withdrawal (years) Return on stock fund (r, %) Step 1: EV of saving from age 22-60 Step 2: Annual withdrawal amount beginning age 61 Hint: Step 1: Find how much money will Jenna save by the time she retires. Step 2: Once you know how much Jenna saves, by retirement, this will become Jenna's PV at that age. Find payment (withdrawal) Jenna gets each year in retirement. 46 Question 7 (12 pts): Step 1: Find Cash flow for Jenna from now until retirement 47 Time Period Cash Flow 48 49 51 Return on stock fund (%) Inflation rate (g) 52 53 54 SS 56 Step 2: Find FV at Retirement Step 3: Jenna's first retirement withdrawal 57 Question 8 (4 pts): 58 Step 4 Value of first retirment withdrawal in today's 5 2 Should Jenna sell her Treasury bond and invest the proceeds in the stock fund?ve at least one reason for and against this plan? 59 60 61 62 63 64 Question 9 (12 pts): Coca-Cola stock 65 Current Price 66 Annual Dividend 67 68 Dividend Growth Expected Dividend in one year 69 70 71 72 73 74 75 76 77 78 79 80 Instructions Adam-Questions 1-4 Jenna Questions 5-9 + 5