Muggie and Lungowe Litooma, both in their 50s, have K100,000 to invest and plan to retire...

 

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Muggie and Lungowe Litooma, both in their 50s, have K100,000 to invest and plan to retire in 10 years. They are considering two investments. The first is a utility company common stock that costs K50 per share and pays dividends of K1 per share per year (a 2% dividend yield). Note that these dividends will be taxed. The Litoomas do not expect the value of this stock to increase. The other investment under consideration is a highly rated corporate bond that currently sells for K1,000 and pays annual interest at a rate of 2.5%, or K25 per K1,000 invested. After 10years, these bonds will be repaid at par, or K1,000 per K1,000 invested. Assume that the Litoomas keep the income from their investments but do not reinvest it (they keep the cash in a non-interest-bearing bank account). They will, however, need to pay income taxes on their investment income. They can either sell or hold onto the stock after 10 years if they buy it. If they buy the bonds, in 10 years they will get back the amount they invested. The Litoomas pay taxes according to the Zambian Tax Laws. Required: i. Discuss the overall purpose people have for investing. Define investment. (3 Marks) Divide a person's life from ages 20 to 70 into 10-year segments and discuss the likely saving or borrowing patterns during each period. (4 Marks) As a student, are you saving or borrowing? Why? (3 Marks) B. Highlight on the investment policy of the Litooma's for the two investments (10 Marks) C. What are the pros and cons of the two investments based on your investment policy for Litooma? (5 Marks) What investment would you advise them to take and why (5) A D. ii. Muggie and Lungowe Litooma, both in their 50s, have K100,000 to invest and plan to retire in 10 years. They are considering two investments. The first is a utility company common stock that costs K50 per share and pays dividends of K1 per share per year (a 2% dividend yield). Note that these dividends will be taxed. The Litoomas do not expect the value of this stock to increase. The other investment under consideration is a highly rated corporate bond that currently sells for K1,000 and pays annual interest at a rate of 2.5%, or K25 per K1,000 invested. After 10years, these bonds will be repaid at par, or K1,000 per K1,000 invested. Assume that the Litoomas keep the income from their investments but do not reinvest it (they keep the cash in a non-interest-bearing bank account). They will, however, need to pay income taxes on their investment income. They can either sell or hold onto the stock after 10 years if they buy it. If they buy the bonds, in 10 years they will get back the amount they invested. The Litoomas pay taxes according to the Zambian Tax Laws. Required: i. Discuss the overall purpose people have for investing. Define investment. (3 Marks) Divide a person's life from ages 20 to 70 into 10-year segments and discuss the likely saving or borrowing patterns during each period. (4 Marks) As a student, are you saving or borrowing? Why? (3 Marks) B. Highlight on the investment policy of the Litooma's for the two investments (10 Marks) C. What are the pros and cons of the two investments based on your investment policy for Litooma? (5 Marks) What investment would you advise them to take and why (5) A D. ii.

Answer rating: 100% (QA)

A Overall people invest in order to grow their wealth and achieve their financial goals Investment is the act of putting money into an asset in order to earn a financial return During the first 10 yea... View the full answer