When using the free-cash flow model, cash flows are discounted at the weighted average cost of capital (WACC) and when using the dividend discount model, dividends are discounted at….
– Scenario A
You are an investor of 55 years of age that has saved 450.000€ after years of working. Since you are thinking on your retirement, you have developed a more risk averse character. Until the day you retire, exactly 10 years from today, you purchase a financial product that will pay a 7,5 % guaranteed dividend. This investment has a maturity date of 10 years. Once you retire at the age of 65 you won’t invest in anything else and the money you have you plan to spend it all until the day you die at the age of 100 years of age.
After explaining this decision to your financial advisor, she suggests that there are some financial products that would give you a monthly payment of X until the day you die regarding the age. With the amount that you have saved up to today the insurance company offers you a payment of 3% yearly.
Calculate the following:
– Scenario A
-Determine the Future Value of the first financial product.
-Determine the monthly amount that you would be receiving if you take the option offered by the insurance company.
-Argue what decision would be best if you lived up to a 100. At what age would you decide that the second decision is best?