QUESTION 10

Caleb prepared the following hypothetical retirement savings example to deliver while he will be meeting with his companys new recruits.

Moonn is 24 year old and the expected retirement age is 68 and her life expectancy is 93 years. Her current annual expenditure is $30,000. The expected inflation rate of current expenditures until retirement and the expected return on investment are 3% and 8%, respectively. Moonn assumes her consumption expenditures will increase with the rate of inflation, 3%, until she retires. Upon retiring she will have end-of-year expenditures equal to her consumption expenditure at age 68.

Caleb calculated the minimum amount that Moonn must accumulate by age 68 in order to fund her retirement is closest to:

	A.	$1,552,000
	B.	$1,176,000
	C.	$928,000

QUESTION 30

New Heritage currently has a Debt to Asset ratio of 33.33 percent but Caleb feels its optimal Debt to Asset ratio should be 16.67 percent. Sales are currently $750,000, and the total assets turnover (Sales/Assets) is 7.5. If New Heritage needs to raise $100,000 to expand, how should the expansion be financed so as to produce the desired debt ratio? Expansion should be finance with:

	A.	100% Equity
	B.	100% debt
	C.	75% debt, 25% equity
	D.	25% debt, 75% equity.

QUESTION 40

One of UMBs high net worth U.S. clients is interested in trading British pounds. He is convinced that current market conditions make the British pounds very attractive relative to Euro and other currencies in the region. In order to create the appropriate strategy to determine whether an arbitrage opportunity exists, Caleb lists the market data on Exhibit 6.

Exhibit 6
Current $/ spot rate	1.85
1-year $/ forward rate	1.70
1-year U.S. Interest rates	8%
1-year U.K. Interest rates	10%

Based on Exhibit 6, Caleb tells his client the following strategy and arbitrage profit.

Strategy: Since the forward rate is lower than what the interest rate parity indicates, we would borrow British pounds, convert to dollars at the spot rate, and lend dollars.

Arbitrage profit: If we borrow 5000, we would profit $640 from the transactions.

With respect to above strategy and arbitrage profit is Caleb correct?

	A.	Caleb is only correct regarding strategy
	B.	Caleb is correct regarding strategy and arbitrage profit
	C.	Caleb is only correct regarding arbitrage profit