Calculate the current value of interest tax savings that contributes to your long-term debt. Now suppose that each issues $ 3 trillion more of long-term debt and that they use the proceeds to repurchase equity. What change would fiscal savings experience?
1. At http://finance.yahoo.com/ search the PepsiCo (PEP) and IBM (IBM) Profile, and then review the Balance Sheet and the Profit and Loss Account for each company. Calculate the current value of interest tax savings that contributes to your long-term debt. Now suppose that each issues $ 3 trillion more of long-term debt and that they use the proceeds to repurchase equity. What change would fiscal savings experience?
2. Lower and click on the word “Industry” or Industry in the left column. This will give you a table of the ratios or financial ratios of different industries. Compare debt ratios among companies’ equity. Can you explain the differences? Are these explained better according to the theory of equilibrium or according to the one of the financial hierarchy?
Case 2B: The Value of Money in Time: Retirement Planning
“Boy, this is all so confusing,” Ryan said as he looked at the documents on his desk. If I had only taken the advice of my finance professor, I would not be in such a situation today. “Ryan Daniels, 27, graduated five years ago with a degree in food marketing and currently works as a Mid-Level Manager for a chain The current annual salary of $ 70,000 has grown at an average rate of 5 percent a year and is expected to increase at least at that rate for the foreseeable future.The company has had a retirement savings program Volunteer on-site, whereby employees can contribute up to 11% of their gross annual salary (up to a maximum of $ 12,000 a year) and the company pairs the contribution with every dollar the employee brings in. Unfortunately, like many other young people Which began in his first “real” job, Ryan has not yet taken advantage of the retirement savings program.He chose to buy a luxury car, rent an expensive apartment and consume most of his income.
However, with wedding plans on the horizon, Ryan has finally come to understand that he should start saving some money for the future. His fiancee, Amber, of course, had a lot to do with the fact that he realized this reality. Amber reminded Ryan that in addition to the withdrawal there would be several other large expenditures coming soon and that it would be prudent for him to design a comprehensive savings plan, taking into account the various cost estimates and deadlines involved.
Ryan figures that the two biggest expenses along the way would be those related to the wedding and the down payment of a house. He estimates the wedding, which will take place in twelve months, should cost about $ 15,000 in current dollars. In addition, he plans to move to a $ 250,000 home (in today’s terms) within 5 years and would need 20% for the down payment. Ryan is aware that his estimates are in current terms and would have to be adjusted for inflation. In addition, he knows that an automatic payroll deduction is probably the best way to do it since he is not a very disciplined investor. Ryan really is not sure how much money he should contribute each month, taking into account the effects of inflation, the differences in terms and the salary increases he would be receiving. The whole issue of numbers seems overwhelming and the goals seem insurmountable. If you had only begun planning and saving five years ago, your financial situation would have been much better. But, as the saying goes, “It’s better late than never!”
Questions:
1. What was the salary at the beginning of Ryan? How much could he have contributed to the voluntary savings plan in his first year of employment?
2. If Ryan had taken advantage of the company’s voluntary retirement plan to the maximum, each year during the last five years, how much money would have currently accumulated in his retirement account, assuming monthly deposits and a nominal rate of return of 7 %? How much more would the value of your investment have been if he had opted for a higher risk alternative (eg, 100% common stock), which is expected to yield an average rate of return of 12%?