Jenna expects her salary to grow regularly. While there are no guarantees, she believes an increase of 4% a year is reasonable. She plans to save $3000 the first year, and then increase the amount she saves by 4% each year as her salary grows. Unfortunately, prices will also grow due to inflation. Suppose Jenna assumes there will be 3% inflation every year. In retirement, she will need to increase her withdrawals each year to keep up with inflation.
In this case, how much can she withdraw at the end of the first year of her retirement?
What amount does this correspond to in today’s dollars? (Hint: Build a spreadsheet in which you track the amount in her retirement account each year.)
1. Should Jenna sell her bond and invest the proceeds in the stock fund? Give at least one reason for and against this plan.
2. At the last minute, Jenna considers investing in Coca-Cola stock at a price of $55.55 per share instead. The stock just paid an annual dividend of $1.76 and she expects the dividend to grow at 4% annually. If the next dividend is due in one year, what expected return is Coca-Cola stock offering
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