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Homework Assignment 2 (8 marks) (individual Work)
1. Suppose you are 40 years old and plan to retire in exactly 20 years. 21 years from now you will need to withdraw $5,000 per year from a retirement fund to supplement your social security payments. You expect to live to the age of 85. How much money should you place in the retirement fund each year for the next 20 years to reach your retirement goal if you can earn 12% interest per year from the fund? (3 Marks)
2. Assume that a particular firm has a total asset of $200 million and it has to choose a financing scheme among three ones. The description of these schemes is given below.
What would you recommend to the CFO (Chief Financial Officer) if we suppose that he has concern about the cost of borrowing and that he would choose the financing scheme that minimizes the amount of interest paid on the financing period? Document your computations and findings. (5 Marks)