Question 1: You want to accumulate enough money over the next 10 years to pay for your son's college. The total costs in 10 years are expected to be $200,000 that you want to pay in advance before the first semester. You currently have $10,000 that you plan to invest over the next 10 years to help pay for college costs. You want to put away an equal, end-of-year amount into an investment account at the end of each of the next 10 years. Earnings on all of the investments are expected to be 7% for the first 5 years and 9% thereafter. What equal, end-of-year amount must you save each year over the next 10 years to meet these needs?(Hint: Use Excel Solver or Goal Seek function)
Question 2: An investor opens a margin account with a discount broker. The initial margin requirement is 50%. The maintenance margin is 30%. The investor intends to buy 1000 shares of XYZ at $40. An interest rate on the margin loan is 4% per year. The stock does not pay any dividends.
a) How much money must the investor deposit?
b) Assuming the investor deposits $30,000 (NOT the amount you calculated in part (a) and buys the shares. How far could the stock price fall before the investor would get a margin call?
c) Assuming the stock price reaches the price you calculated in part (b) and the investor receives a margin call. How much money must theinvestor deposit to avoid the liquidation actions by the broker?
d) Assume that the investor receives a margin call in one year after purchasing the stock, but instead of depositing the amount calculated in part (c) he or she sells the shares. What is the rate of return realized by the investor?
e) Assume the investor has a cash account (not margin account) and he or she sells the shares at the price you calculated in part (b). Recalculate the investor's rate of return.
f) Assume in one year the stock's price did not fall but increased to $45, and the investor holds the shares. What is the buying power of his or her margin account?
g) Assuming the situation described in part (f), how much can the investor withdrawin cash?
h) Assuming the investor decides to short sale the stock (instead of buying it in the beginning) and receives $40 per share. If he/she deposits $30,000 (as stated in part (b), how far can the stock price raise before the investor receives a margin call?
Question 3: The Equity Fund cells Class A shares with a front-end load of 4% and Class B shares with 12b-1 fees of 0.5% annually as well as back-end load fees that start at 5% and fall by 1% for each full year the investor holds the portfolio (until the fifth year). Assume the rate of return on the fund portfolio net of operating expenses is 10% annually. What will be the value of a $10,000 investment in Class A and Class B shares if the shares are sold after
(a) 1 year,
(b) 4 years,
(c) 15 years?
Which fee structure provides higher net proceeds at the end of each investment horizons?
Question 4: A mutual fund portfolio currently is worth $ 800 million. During the year, the fund sells stocks worth of 200 million and realizes the long term capital gains of $50 million. The fund uses all of the proceeds to buy common stocks of different companies. The fund has current liabilities of $2 million and 20 million shares outstanding. You own 1,500 shares of the mutual fund.
a. What was the portfolio turnover rate?
b. What is the net asset value of the fund?
c. What is your portfolio worth?
d. If your tax rate on long term capital gains income is 15%, how much extra you will owe on this year's taxes as a result of these transactions?
e. If in December the NAV of the fund depreciates 10 percent, what is your end of year portfolio worth? Do you still need to pay taxes calculated in part (d)? If yes, what can you do to legally avoid paying these taxes?