Mary is 40 years old, plans to retire at 65 and the actuarial tables tell her she can expect to live until 80. The market value
of her stock portfolio and home are, respectively, $300,000 and $400,000. She expects to earn $100,000 per year over the rest of her career.Plot Mary’s consumption function. What is her autonomous consumption and marginal propensity to consume? Use the consumption function: C = (W + RY)/ T where W is wealth (total assets), R is years to retirement, Y is annual income, and T is years left to live.
1 answer:
Answer:
b) Aa per life cylce theory, a person will save during his work time and dissave during retirement time. So he will save a part of his income up to retirement.
c) Mary's market value of home was $400000.when its value decreased 50%,it will reduce to $200000.so it will badly affect his saving also.
d) Mary's annual salary is $100000.If it decreased 50%, it will become 50000.so it may highly affect his saving than consumption.
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Answer:
A. Market Capitalization rate = 13%
B. Intrinsic Value = $46.22
Explanation:
<em>A. Market Capitalization rate:</em>
CAPM should be used to calculate market capitalization from the given data. Following is the formula for CAPM
r = risk free rate
M = market portfolio return
B = beta
Solution:
CAPM = 13%
<em>B. Intrinsic Value of stock</em>
Gordon Growth Model (GGM) should be used to calculate intrinsic value of stock based on the given data.
Following is the formula for GGM
D = Current Dividend
g = Dividend Growth rate
r = market capitalization rate (CAPM calculated in part A)
Solution:
DDM = $46.22
<em>Note: All values are rounded off to two decimal points.</em>