After a retiring from a successful business career, you would like to make a donation to your university. This donation will go into the school's endowment pool and the returns generated from the donation will support the salary of a new professor in the business school on a perpetual basis. The university expects to earn returns of 5.5% on its endowment pool. You may assume that any distributions to support the salary will be made annually. Part A) You can make a donation today (t=0) in the amount of $2,000,000, The first cash flow distribution from your donation to cover the professor's salary will take place in one year (at t=1). Which of the following is closest to the annual salary payment that can be made as a result of your donation? O A. $110,000 O B. $363,636 O C. $80,000 O D. $2,000,000 Part B) After further discussions, the university determines that the employment agreement with the new professor will call for annual salary increases of 2%. Given this new requirement, and assuming the first salary distribution will still occur one year from today, what is the starting salary (at t=1) that can be supported with your $2,000,000 donation? O A. $112,200
After a retiring from a successful business career, you would like to make a donation to your university. This donation will go into the school's endowment pool and the returns generated from the donation will support the salary of a new professor in the business school on a perpetual basis. The university expects to earn returns of 5.5% on its endowment pool. You may assume that any distributions to support the salary will be made annually. Part A) You can make a donation today (t=0) in the amount of $2,000,000, The first cash flow distribution from your donation to cover the professor's salary will take place in one year (at t=1). Which of the following is closest to the annual salary payment that can be made as a result of your donation? O A. $110,000 O B. $363,636 O C. $80,000 O D. $2,000,000 Part B) After further discussions, the university determines that the employment agreement with the new professor will call for annual salary increases of 2%. Given this new requirement, and assuming the first salary distribution will still occur one year from today, what is the starting salary (at t=1) that can be supported with your $2,000,000 donation? O A. $112,200
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:After a retiring from a successful business career, you would like to make a donation to your university. This donation will go into the school's endowment pool and the returns generated from the donation
will support the salary of a new professor in the business school on a perpetual basis. The university expects to earn returns of 5.5% on its endowment pool. You may assume that any distributions to
support the salary will be made annually.
Part A) You can make a donation today (t=0) in the amount of $2,000,000. The first cash flow distribution from your donation to cover the professor's salary will take place in one year (at t=1). Which of the
following is closest to the annual salary payment that can be made as a result of your donation?
O A. $110,000
O B. $363,636
O C. $80,000
O D. $2,000,000
Part B) After further discussions, the university determines that the employment agreement with the new professor will call for annual salary increases of 2%. Given this new requirement, and assuming the
first salary distribution will still occur one year from today, what is the starting salary (at t=1) that can be supported with your $2,000,000 donation?
O A. $112,200
O B. $70,000
OC. $40,000
D. $150,000
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