1) Assume that your father is now 50 years old, that he plans to retire in 10 years, and that he expects to live for 25 years after he retires, that is, until he is 85. He wants a fixed retirement income that has the same purchasing power at the time he retires as $40 thousand has today (he realizes that the real value of his retirement income will decline year by year after he retires). His retirement income will begin the day he retires, 10 years from today, and he will then get 24 additional annual payments. Inflationis expected to be 5 percent per year from today forward; he currently has $100 thousand saved up; and he expects to earn a return on his savings of 8 percent per year (with annual compounding). To the nearest dollar, how much must he save during each of the next 10 years (with deposits being made at the end of each year) to meet his retirement goals?
2) Upton Computers makes bulk purchases of small computers, stocks them in conveniently located warehouses, and ships them to its chain of retail stores. Upton's balance sheet as of December 31, 2015 is shown here (in millions of dollars):
Cash $ 3.5 Accounts payable 9.0
Account receivable 26 Notes payable 18.0
Inventories 58 Accruals 8.5
Total current assets $ 87.5 Total current asset 35.5
Net fixed asset 35 Mortgage loan 6.0
Total assets 122.5 Common stock 15.0
Retained earning 66.0
Total liabs& equity 122.5
Sales for 2016 were $350 million, while net income for the year was $10.5 million. Upton paid dividends of $4.2 million to common stockholders. The firm is operating at full capacity. During 2016:
a. Sales are projected to increase by $70 million. ?
b. They have an average tax rate of 35%. ?
c. Average Days Sales Outstanding is projected at 30 days. ?
d. Gross Margin (Sales - COGS) will average 35%, while inventory turns will ?improve to 5 times. ?
e. The current Mortgage Loan will be reduced by $2 million. ?
f. All other ratios, including the dividend payout ratio, will remain constant.
Construct a projected Balance Sheet and Income Statement for the year-ended 12/31/2016.
3) Upton Computers, see above, has determined that their average, after-tax cost of funds (their WACC) is 10%. Estimate their EVA and explain why their EVA is positive or negative.