Question

Problem 16-06 You invest $800 in stock A and $800 in stock B. If you earn 10 percent on stock A and 5 percent on stock B and hold each security for 15 years, what are the terminal values for each investment? Round your answers to the nearest cent. Stock A: $ Stock B: $ If you continue to hold each security and earn the same returns for 25 years, how much more will stock A generate than stock B over the entire time period? (When you invest for retirement, you should think about the impact of returns over time.) Round your answer to the nearest cent.

use interest factor of the future value of a dollar (appendix A in the problem)

Answer 1

The formula for future value:

Future value = Present value x (1 + i)

1

Stock A value after 15 years is:

Future value = 800 x (1 + 0.10) 15

Future value = 800 x 4.177248169

Future value = 3, 341.80

Stock B value after 15 years is:

Future value = 800 X (1+0.05)15

Future value = 800 x 2.078928179

Future value = 1,663.14

2

Stock A value after 25 years is:

Future value = 800 x (1 + 0.102

Future value = 800 x 10.83470594

Future value = 8,667.76

Stock A generated ($8,667.76 - $800) = $7,867.76.

Stock B value after 25 years is:

Future value = 800 X (1+0.05)2

Future value = 800 x 3.386354941

Future value = 2709.08

Stock B generated ($2,709.08- $800) = $1,909.08.

The extra amount generated by stock A is ($7,687.76 - $1,909.08) = $5,978.68.