Essentials Of Investments
11th Edition
ISBN: 9781260013924
Author: Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher: Mcgraw-hill Education,
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Kelly is a diligent mother who has just finished supporting her two children, Susan, aged 23, and Randy, aged 25, through their university education. Both Susan and Randy have embarked on their careers and have moved out. Kelly wants to continue supporting them by providing financial assistance for their future endeavors, such as purchasing their first home or pursuing further education. She aims to give each of them an equal amount of money when they reach the age of 30. Currently, Kelly has $15,000 in savings, which she plans to allocate to Randy, as she will reach 30 first. She intends to provide Randy with $35,000. Kelly's investments generate a 6% return before tax, and her marginal tax rate is 35%. The inflation rate is estimated to be 3%.
All savings are deposited at the end of the year.
Required:
(a) Calculate the annual savings Kelly needs to make to accumulate $35,000 to give to Randy when she turns 30.
(b) Determine the fair amount Inaaya should give to Susan when he reaches 30, considering that Randy will receive $35,000.
(c) Compute the annual savings Kelly should make, starting now, to reach the amount calculated in (b) for Susan.
(d) Kelly’s mortgage will be paid off in three years. Until then, she can only contribute a total of $3,500 per year to the "children's fund". After the mortgage is paid off, Kelly can allocate up to $25,000 per year. Calculate the annual savings Kelly needs to make after the mortgage is repaid to achieve her goal for Susan.
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