Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Please show all work on spreadsheet Section 1 : Problem Statement John Smith graduated 5 years ago, with a Business degree and an emphasis in

Please show all work on spreadsheet
Section 1: Problem Statement
John Smith graduated 5 years ago, with a Business degree and an emphasis in Finance. John is currently employed as a Sr. Financial Analyst in the Corporate Finance department of a multinational corporation. He has progressed well in his career, with the ultimate goal of becoming the company's CFO. John's current salary of $78,000 has increased at an average rate of 5% per year, with routine merit raises, and he expects to continue doing so.
John's firm, ABC Corporation, has a defined contribution plan (401k) plan in place. Employees are allowed to contribute up to 10% of their gross annual salary (up to a maximum of $10,000 per year) and the firm will match 50% of the employee's contribution. Unfortunately, John has not yet taken Professor Money Man's advice to "Save, Start Young, and Pay Yourself First." Instead, John has enjoyed his post-college, nice-salary life by leasing a new car, renting an apartment and going out to Player's every weekend. Now that he has wedding plans on the horizon, John has come to the realization (with help from his fiance, Jane Doe) that it's time to start saving - while he's still young!
John expects that the lovebirds' two largest future expenses will be the cost of a wedding (short-term), then later the down payment on a house (medium-term). The couple plans to spend $10,000 of their own money on the wedding in twelve months. They also hope to purchase a $400,000 house in 5 years. Jane's parents have promised to match their 10% down payment, but only if they manage to save it within 5 years. Talk about motivation to save! Both future spouses agree that John will automate his savings by setting up monthly contributions to his 401k, wedding and house accounts.
John's fiancee, Jane Doe, is adamant about getting married in the next year. She is insisting that John makes saving towards the $10,000 needed a top priority. John recalls that Professor Money Man says "not to invest in long-term investments with short-term money." Therefore, he plans to keep the wedding account in the bank and buy short-term (under 1 year maturity) CD's, Assuming John stays continuously invested in CD's yielding 2% annual yield for the duration of each monthly deposit from the beginning month (Month 0), how much will he have to contribute to the wedding fund every month for the next 12 months?
image text in transcribed

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image_2

Step: 3

blur-text-image_3

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Derivatives Markets

Authors: Robert L. McDonald

2nd Edition

032128030X, 978-0321280305

More Books

Students also viewed these Finance questions