exam 1

Question 1

Ben Collins plans to buy a house for $210,000. If that real estate is expected to increase in value 3 percent each year, what would its approximate value be six years from now?

Answer 1

$250,750.98

210,000 [+/-] [PV] 3 [I/YR] 6 [N] [CPT] [FV]

Question 2

If you desire to have $20,000 for a down payment for a house in five years, what amount would you need to deposit today? Assume that your money will earn 4 percent.

Answer 2

$16,438

20,000 [FV] 4 [I/YR] 5 [N] [CPT] [PV]

Question 3

Pete Morton is planning to go to graduate school in a program of study that will take three years. Pete wants to have $15,000 available each year for various school and living expenses. If he earns 4 percent on his money, how much must be deposited at the start of his studies to be able to withdraw $15,000 a year for three years?

Answer 3

$41,626.37

15,000 [PMT] 3 [N] 4 [I/YR] [CPT] [PV]

Question 4

Carla Lopez deposits $3,400 a year into her retirement account. If these funds have an average earning of 9 percent over the 40 years until her retirement, what will be the value of her retirement account?

Answer 4

$1,148,800.13

3400 [+/-] 9 [I/YR] 40 [N] [CPT] [FV]

Question 5

If you earn 7 percent on your investments, how long would it take for your money to double?

Answer 5

10.24 years

100 [+/-] [PV] 200 [FV] 7 [I/YR] [CPT] [N]

Question 6

How many years will it take to have $100 to grow to $300 if invested at 20 percent compounded annually?

Answer 6

6.03 years

100 [+/-] [PV] 300 [FV] 20 [I/YR] [CPT] [N]

Question 7

You bought a painting 10 years ago as an investment. You originally paid $85,000 for it. If you sold it for $484,050, what was your annual return on investment?

Answer 7

19%

85000 [+/-] [PV] 484050 [FV] 10 [N] [CPT] [I/YR

Question 8

If you deposit $400 at the end of each year for 10 years in a savings account that pays 6 percent interest per year, how much will you have at the end of 10 years?

Answer 8

$5,272.32

400 [+/-] [PMT] 10 [N] 6 [I/YR] [CPT] [FV]

Question 9

The Fuller Company has received a $50,000 loan. The annual payments are $6,202.70. If the Fuller Company is paying 9% interest per year, how many loan payments must the company make?

Answer 9

15

50000 [PV] 6202.70 [+/-] [PMT] 9 [I/YR] [CPT] [N]

Question 10

Your firm plans to buy a warehouse for $100,000. The bank offers you a 30-year loan with equal annual payments and an interest rate of 8% per year. The bank requires that your firm pay 20% of the purchase price as a down payment, so you can borrow only $80,000. What is the annual loan payment?

Answer 10

$7,106.19

80,000 [PV] 30 [N] 8 [I/YR] [CPT] [PMT]

Question 11

3 main elements that affect financial planning activities:

Answer 11

1. Life situation
2. Personal values
3. Economic factors

Question 12

Economics

Answer 12

study of how wealth is created and distributed

Question 13

Economic conditions that most often influence financial decisions

Answer 13

• Consumer prices
• Consumer spending
• Interest rates

Question 14

Inflation

Answer 14

• a rise in general level of prices

- likely to result from increased demand by consumers without increased supply

Question 15

Consumer price index (CPI)

Answer 15

The annual price increase for most goods and services measured by the Bureau of Labor Statistics

Question 16

The rule of 72

Answer 16

to find out how fast prices will double, divide 72 by annual inflation (or interest) rate

Question 17

Financial goals should take S-M-A-R-T approach:

Answer 17

• Specific
• Measurable
• Action-oriented
• Realistic
• Time-based

Question 18

Opportunity cost

Answer 18

what you give up by making a choice. This cost, commonly called trade-off, cannot always be measured w/ dollars

Question 19

Most common personal opportunity cost

Answer 19

time

Question 20

Time value of money

Answer 20

calculates increases in amount of money b/c of interest earned. Saving or investing dollar instead of spending it today results in future amount greater than dollar,

Question 21

Computation of interest is based on:

Answer 21

(1) Amount of savings
(2) Annual interest rate
(3) Length of time money remains deposited

Question 22

The main goal of personal financial planning is managing your money to:

Answer 22

achieve personal economic satisfaction.

Question 23

An example of a personal opportunity cost would be:

Answer 23

time comparing several brands of personal computers

Question 24

If inflation is increasing at 3.9 percent per year, and your salary increases at the same rate, how long will it take your salary to double?

Answer 24

19 years

Question 25

If you desire your savings to double in 5 years, what rate of return would you need to earn? (Use the Rule of 72.)

Answer 25

14.40%

Question 26

The advantages of personal financial planning include:

Answer 26

- Increased effectiveness in obtaining, using and protecting your financial resources - Increased control of your financial affairs by avoiding excessive debt and bankruptcy - Improved personal relationships resulting from better communicated financial decisions

Question 27

Kent Fuller is in the 28 percent tax bracket. A nontaxable employee benefit with a value of $500 would have a tax-equivalent value of approximately

Answer 27

$694 Tax-equivalent value = Tax-exempt value/(1 –tax rate) $500/(1 − 0.28) = $694.44

Question 28

Caroline lives in City A and earns $40,000 per year. The cost of living index in City A is 80. She is considering a move to City B which has a cost of living index of 90. How large a salary will she require in City B to maintain her current standard of living?

Answer 28

$45,000 Salary in City A x (City B COL index/City A COL index) =$40,000(90/80)=$45,000

Question 29

Leeanna Roberts uses a computer to organize her personal financial records and update her budget activities.. These activities are an example of:

Answer 29

money management

Question 30

One of the main purposes of personal financial statements is to:

Answer 30

Measure your progress toward financial goals.

Question 31

A family with $50,000 in assets and $22,000 of liabilities would have a net worth of

Answer 31

$28,000 •Net Worth=Assets − Liabilities = $50,000 − $22,000 = $28,000

Question 32

This month, Kenneth Goldberg has cash inflows of $2,950 and cash outflows of $2,800, resulting in a

Answer 32

``` surplus of $150 Cash Inflows=$2,950 Cash Outflows=$2,800 Cash Inflows–Cash Outflows=$150>0 This is a surplus. ```

Question 33

When preparing her monthly budget, Maria Kent has projected income of $3,700. Each month she pays $1,200 in rent, $42 for life insurance, and $240 for her auto loan. What percentage of her budget goes for these fixed expenses?

Answer 33

40% Total Fixed expenses / projected income = ($1,200 + $42 + $240) / $3,700 = $1,482 / $3,700 = 0.40 = 40%

Question 34

A taxable investment produced interest earnings of $1,200. A person in a 22 percent tax bracket would have after-tax earnings of

Answer 34

$936 •Taxable gross earnings –tax owed = After-tax earnings Tax owed = earnings x tax rate = $1,200 ×0.22 = $264 After-tax earnings=$1,200-$264=$936 •Or:After-tax earnings=Taxable gross earnings x (1–tax rate) = $1,200 x (1 –0.22) = $936

Question 35

A person has $5,000 in medical expenses and an adjusted gross income of $33,000. If taxpayers are allowed to deduct the amount of medical expenses that exceed 7.5 percent of adjusted gross income, what would be the amount of the deduction in this situation?

Answer 35

$5,000 − ($33,000 ×7.5%) = $2,525.

Question 36

George Washburn had earnings from his salary of $32,000, interest on savings of $200, a contribution to a traditional individual retirement account of $1,200, and dividends from mutual funds of $125. George's adjusted gross income (AGI) would be

Answer 36

32,000 + $200 + $125 –$1,200 = $31,125.

Question 37

``` Kim Lee is single and earns $32,000 in taxable income. Use the following tax rate schedule to calculate the taxes he owes. Up to $9,525 10% $9,525-$38,700 12% $ 38,700 -$82,500 22% $82,500-$157,500 24% ```

Answer 37

[$9,525 ×0.10] + [($32,000 –$9,525) ×0.12] = $3,649.50

Question 38

Effective personal tax strategies include:

Answer 38

- take advantage of tax credits for which you qualify. - consider tax-exempt investments, such as municipal bonds. - search out all possible itemized deductions. - maximize contributions to tax-deferred retirement programs.

Question 39

balance sheet

Answer 39

consists of assets (items of value), liabilities (amounts owed to others), and net worth (the difference between the total assets and total liabilities).

Question 40

cash flow statement

Answer 40

- summarizes actual inflows and outflows of cash during a given time period. - report of your spending patterns and can be used to create budget amounts for various expense categories.