Suppose That You Are Planning to Enroll in a Master's

question 9

Multiple Choice

Suppose that you are planning to enroll in a master's program two years in the future.The cost to enroll is $150,000.You expect to have the following funds: •From your current job,you can save $5,000 after one year and $7,000 after two years.
•You expect a year-end bonus of $9,000 after one year and $15,000 after two years.
•Your grandparents saved money for your education in a tax-favored savings account and will give you $18,000 after one year.
•Your parents offer you the choice of taking $50,000 at any time,but that amount is deducted from your inheritance.They are risk-averse investors and put money in ultra-safe government bonds giving 2 percent per year.
The borrowing and the lending rate at the bank is 4 percent per year,compounded daily.Approximating this by continuous compounding,how much money will you need to borrow when you start your master's degree education two years from today?

• A) $39,489
• B) $40,530
• C) $42,489
• D) $47,501
• E) None of these answers are correct.

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Definitions:

Operating Leverage

A measure of how revenue growth translates into growth in operating income, influenced by the proportion of fixed costs to variable costs.

Variable Costs

Expenses that vary in direct relation to the amount of output or sales.

Fixed Costs

Expenses that do not change with the level of output or sales, such as rent, salaries, and insurance, remaining constant regardless of business activity levels.

Margin of Safety

The difference between actual or anticipated sales and the sales level at the break-even point, measured to assess the risk of not covering fixed costs.