Annuity & Tax/Dividends

  1. Mary Welch is retiring this year and wishes to set up an annuity for 20 years of her retirement. MetLife will
    pay her 3.60% on that annuity, and she will fund it with $400,000. What will be her quarterly income from the
  2. If she wants $9,000 per quarter, what must she put into the annuity, to the nearest dollar?
  3. Champion Credit Union initiates a credit card product that yields 8.40%, with a funds cost of 3.00% (their
    profit spread is 5.40%). Legacy Savings Bank enters that market with an equivalent product yield. How low
    must they price their funding source to be equally able to retain earnings if the marginal tax rate is 20%, and a
    competitive dividend payout is 30%?
  4. If Highland Commercial Bank (HCB) enters that market with a marginal tax rate of 25%, and a dividend
    payout of 20%, and they can obtain funding at 3.00%, what will be their retained earnings spread if they have
    the same credit card price of 8.40%?

Sample Solution