Busi 640 Case Study Answers

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Financial Management (BUSI 640) Problem Set 1: 1. You are a financial advisor helping a young family create a college fund to provide for their daughter Mary’s education. Mary just turned 5. Her parents want to make sure that they can afford to send her wherever her potential allows her to go, starting school on her 18th birthday. She will only take four years to complete her degree. Currently, tuition and housing costs at top private schools total $35,000 per year, which are paid at the beginning of each school year. These expenses are expected to increase at the rate of inflation which will run at 4% annually for the next 25 years. In each year through her 18th birthday, Mary’s parents will make a deposit into the college fund so…show more content…
What should be the amount of the first deposit to the savings account? N=13, g=2%, r=10%*(1-30%)=7%, FV=PVage 18=$223488.55 First deposit: FV=Pmtr-g[(1+r)n-(1+g)n] $223488.54=Pmt7%-2%[(1+7%)13-(1+2%)13] Pmt=$10010.79 d. Alternatively, Mary’s parents could open a 529 account that allows college savings to grow tax-free. If they saved in this account rather than in a normal investment fund, and still earned the same pre-tax return, how much should be their first deposit? r= 10%, Pmt=$58277.57, g=4%, n=4 Present Value on Mary’s 18th birthday : PVage 18=58277.57+58277.57*(1+4%)/(1+10%)+58277.57(1+4%)^2/(1+10%)^2+58277.57*(1+4%)^3/(1+10%)^3= $214721.71 N=13, g=2%, r=10%, FV=PVage 18=$214721.71 First deposit: FV=Pmtr-g[(1+r)n-(1+g)n] $214721.71=Pmt10%-2%[(1+10%)13-(1+2%)13] Pmt=$7957.58 2. You are a bank officer designing a mortgage for a young couple. The current mortgage rate for 30 year fixed-rate mortgages is 6.5%, compounded monthly. The couple is buying a $300,000 house and has a down payment of $60,000. They wish to take out a fixed-rate mortgage on the

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