Question

PLEASE ANSWER ALL 3 TRUE OR FALSE.

1. Assume you must pay taxes on the returns you when you sell them. You invested in the common stock of facebook when it was selling for $30 per share. It now sells for $185 six years later. You are going to sell the 100 shares you bought. What is your after tax annual return on this investment. You must pay 20% of your gains in capital gains tax to the U.S. government.

2. You are 20 years old. You plan to work until you are 80 years old. When you turn 80 you will retire. You expect to live until an age of 95. You have forecasted that you will need $50,000 a year in income for your retirement. Your current salary is $45,000 per year. You expect your salary to grow by 0% per year. You will save 5% of your gross income each year. You will invest your savings in risk free treasury notes that are expected to yield 3% each year. Based on this information you will have accumulated enough wealth to finance your retirement.

3) You are 20 years old. You plan to work until you are 80 years old. When you turn 80 you will retire. You expect to live until an age of 95. You have forecasted that you will need $50,000 a year in income for your retirement. Your current salary is $45,000 per year. You expect your salary to grow by 1% per year. You will save 2% of your gross income each year. You will invest your savings in risky securities that are expected to yield 6% each year. Based on the information in this problem you will have accumulated enough wealth to finance your retirement.

Answer 1

Answer

1. true

Capital gain on selling stock of facebook = (Sale price - purchase price)* number iof shares

= (185-30)*100

= $15500

Tax on capital gains = 15500*20% = $3100

Annual return on stock = (100*185)*20%

= $3700

After tax return on investment = [(15500-3100) + 3700] / 3000

= 537%

2. false

present value of annuity = payment per period * [ 1 - (1+i)^-n ]/i

amount required at time of retirement

= 50000 * [1-(1+3%)^-15]/3%

= 596896.75

3.False

future value of annuity = payment per period * [(1+i)^n - 1]/i

deposit per period = 45000 * 5% = 2250

future value of deposits = 2250 * [(1+3%)^60 -1]/3%

= 366870.23

hence false, this amount is not enough to cover amount required at time of retirement