Mr. Anwar will retire at the age of 60. He expects to live 20 more years and to
spend Rs. 55,000 a year during his retirement. How much money does he need to save by age 60 to support this consumption plan? Assume an interest rate of 7 percent.

Question # 02 Star Industries has not been growing since past 20 years because of certain legal hazards. It earns Rs. 15 per share per year and pays it all out to stockholders. The stockholders have alternative, equivalent‐risk ventures yielding 20 percent per year on average. What is the worth of one share of Star Industries? Assume the company can keep going indefinitely.

The Star Industries one share's value is 75 Rs.

"The stockholders have alternative, equivalent‐risk ventures yielding 20 percent per year on average"

So the 100% of 15 is 75.

Correct me if i am wrong


Question 1


As For Question 1 Mr anwar want to live 20 more years with spending 55000 each year.

So 55000 X 20 = 1,100,000

The interest rate is 7%

7% of 1,100,000 is 77,000

so we will add 1,100,100 + 77,000 to get final result which is

1,177,000

Again correct me if i am wrong

__________________
Time only knows

Question 1
Let us see now, the subject will live 20 year more after retirement (I wonder how does he know that). To sustain he has to have a constant inflow of 55,000 each year. The simple question is that how much does he need to save till his retirement. In even simpler words how much do you have to save today to spend 55,000 every year for 20 years from now on? Given that interest rate is 7 percent.

This is a “Present Value Annuity” problem, since future cash flows are constant.
Therefore,
Present Value = A cash flow (Remember they are constant) X Present Value Annuity Factor (From the “time value of money” tables)
So,
55,000 X 10.5940 = 582,670
Mr. Anwar will need Rs. 582,670 at the time of his retirement to sustain. (And it is of course understood he will have to save it in a bank that give 7% interest.)


Question 2

At this question arslanbhutto is totally right. Only little explanation is needed.

Company earns Rs. 15 on a share. Since the stockholders have alternative, equivalent‐risk ventures yielding 20 percent per year on average, therefore Rs. 15 are 20% of Share price.

Or

Share Price X .20 = 15

Or

Share price = 15/.20

Or

Share Price = 75

__________________
Nor fame, nor power, nor love, nor leisure.
Others I see whom these surround—
Smiling they live, and call life pleasure;—
To me that cup has been dealt in another measure.