Get Homework Help On Finance Practical Question Answer


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Assignment Details:

  • Referencing Styles: APA
  • Words: 3000
  • Course Code: fine 4050
  • Course Title: Finance
  • University: University of Toronto
  • Country: CA


Question 1

Your total annual income is $105,000 per year. To simplify the analysis, assume that it will remain at this level for the rest of your (infinite) life. You pay income taxes according to the following tax schedule: Income Maringal Rate 0 – 25,000 15% 25,000.01 – 50,000 25% 50,000.01 – 100,000 40% > 100,000 50% You have access to a single deduction offered through a tax-deferred savings account (that has no contribution limit) and no tax credits. You need $60,000 of your after-tax income to cover your annual expenses (i.e., total consumption) and will invest the rest. You can choose a taxable account where you will be subject to the capital gains tax or a tax-deferred account where taxes will be deferred until you withdraw your money (remember that in a tax-deferred account: i) contributions are tax-deductible and ii) withdrawals are treated as ordinary income). You will invest your savings in an exchange-traded fund (ETF) earning an annual rate of return equal to 5% (after fees) that pays no dividends. Question 1A: Assuming you make a single deposit and have a holding period of 10 years (i.e., you will withdraw everything after 10 years of growth), which account would be preferred? Please make sure you show all relevant calculations. Question 1B: How would your answer to part A change if your holding period was equal to 20 years? Explain. Question 1C: Consider investing in a taxable account. Explain in general terms how leverage would impact the rate of return. I.e., compared a leveraged position to a non-leveraged position. Note: Ignore any transaction costs and show all relevant calculations.


Question 2

It is January 1st, 2020 and you just turned 30 years old. Your wages grow at a nominal rate of 4% per year until you retire, with certainty, and are paid at the end of each year. Your next paycheque will be $80,000 and you live in a country that has a flat income tax rate of 30%. You currently have $50,000 in debt and require $15,000 per year to cover your subsistent consumption. You want your discretionary consumption to decline at a real rate of 1% per year and your non-discretionary consumption (subsistent consumption) to remain constant in real terms. Lastly, assume: a real valuation rate of 5% per year, an inflation rate of 2%, you die with certainty at age 90, retire at age 65 and that you want to leave your children (and grandchildren) a legacy of $150,000. Moreover, you want to actually observe the happiness they derive from this additional wealth. In particular, you want to give them this $150,000 on your 75th birthday. Please answer the following, stating any assumptions if necessary (ignore implicit liabilities). Part A: Please compute your current optimal discretionary consumption and optimal savings rate. Part B: Please compute the amount of financial capital you will have when you retire.