Fundamentals of Financial Planning Flashcards
Katie owns 1 share of stock that was purchased 5 years ago for $20. The stock paid dividends of:
Year 1: $2.00
Year 2: $3.00
Year 3: $3.50
Year 4: $4.00
Year 5: $4.50
At the end of Year 5, the stock was worth $25. What is Katie’s compounded rate of return (IRR)?
A.4.6
B.8.5
C.12.4
D.19.3
Solution: The correct answer is D.
CFo = <20>
CFj = 2.00
CFj = 3.00
CFj = 3.50
CFj = 4.00
CFj = 4.50 + 25 = 29.50
IRR = 19.3%
On December 31st Lisa purchased a home with a 20-year mortgage for $150,000 and an 8% compounding interest rate. What is Lisa’s principal reduction for the first year?
A.$1,814
B.$3,171
C.$2,507
D.$3,912
Solution: The correct answer is B.
N = 20 × 12 = 240
i = 8/12 = .6667
PV = 150,000
PMT = ?
FV = 0
PMT = 1,254.66 (ensure you are in END MODE in this step)
To complete the answer, one more step must be done:
On the TI BAII Plus, 2nd AMORT, P1 = 1, enter, down arrow, P2 = 12, enter, down arrow twice to PRN
Final answer is $3,170.4993 rounded to $3,171.
Tom, a CFP® professional, has developed a comprehensive financial plan for his client. Based on the CFP Board Practice Standards which of the following should Tom do next?
A.Review the plan with the client’s CPA and Attorney prior to contacting the client.
B.Implement the financial planning recommendations.
C.Present the financial planning recommendations to his client.
D.Develop financial planning recommendations.
Solution: The correct answer is C.
A CFP® professional must present to the Client the selected recommendations and the information that was required to be considered when developing the recommendation(s). A is incorrect, this level of diligence is not required of a CFP® professional. B is incorrect, this step occurs after presentation. D is incorrect, this step occurs before presentation.
Which of the following are forms of discipline according to CFP Board’s Code of Ethics:
Suspension
Public Letter of Admonishment
Private Censure Released on CFP Board’s Public Website
Temporary Revocation
A.I and II
B.I, II and IV
C.III and IV
D.II and III
Solution: The correct answer is A.
A private censure made public is a public letter of admonishment. Revocation is always permanent.
What is the net present value of the cash flows from a piece of equipment that is purchased for $10,000 and over a 4 year period generates the following cash flows:
Year 1: $2,000
Year 2: $2,500
Year 3: $3,500
Year 4: $4,000
Assume the equipment can be sold at the end of the 4th year for $1,000 and assume the required rate of return is 7%.
A.<724>
B.724
C.<674>
D.674
Solution: The correct answer is B.
CFo = <10,000>
CFj = 2,000
CFj = 2,500
CFj = 3,500
CFj = 4,000+1,000=5,000
i = 7
NPV = 724
Which one of the following are false regarding Coverdell ESA and a 529 Savings Plan?
A.A 529 Plan allows 5-year proration of contributions.
B.A Coverdell has a phase-out limit for participation.
C.A 529 Plan does not have a phaseout limit for participation.
D.Distributions from an ESA or 529 can be used for private elementary, middle school, high school, college or trade school and qualified apprenticeships.
Solution: The correct answer is D.
As of 2018, a 529 Plan may also be used for private elementary, middle or high school as can an ESA.
SECURE Act 2019 added qualified distributions from a 529 plan for trade schools and qualified apprenticeships. ESAs did not see the same changes from this Act.
Ross is employed as a loan officer at a local bank. Ross recently sat down and visited with his financial planner Julie, a CFP® professional. Ross was in need of cash and borrowed $9,500 from Julie. Based on duties owed to a client (15- Refrain from Borrowing or Lending Money and Commingling Financial Assets) is Julie in violation of this rule?
A.Julie is not in violation of the rule because Ross is in the business of lending money
B.Julie is in violation of the rule because a CFP® certificant must never lend money to a client.
C.Julie is not in violation since she loaned Ross less than $10,000.
D.Julie is in violation of the rule.
Solution: The correct answer is D.
Julie, as a CFP® professional, is prohibited from borrowing money from or lending money to a client, except in specific circumstances. In this case, Ross is Julie’s client, and there’s no indication that Ross is a member of Julie’s family or that Julie is a business organization in the business of lending money. Therefore, by lending $9,500 to Ross, Julie is in clear violation of the rule.
Robert, a CFP® professional, performed a needs analysis concerning Jack’s life insurance situation last year and sold him a universal life policy under a limited scope engagement. This year, Jack wants Robert to evaluate his investment allocation, risk tolerance and recommend some mutual funds. All of the following information is required to be provided to Jack according to the Code of Ethics and Standards of Conduct EXCEPT?
A.Terms of the engagement including the scope of the engagement with any limitations, the period services will be provided and responsibilities of the Client.
B.Disclosure of Economic Benefit for Referral or Engagement of Additional Persons.
C.How the CFP® professional and their firm are compensated for providing products and services.
D.A written agreement covering the specific obligations and responsibilities of each party.
Solution: The correct answer is D.
Robert’s obligations of disclosure to Jack require (Obligations to clients 10) disclosing answers B and C. As the engagement will require a discussion of client goals and working to meet those goals this is a financial planning engagement. As such any limitations, end date and a scope of engagement must be provided.
Subjectivity tends to dominate whose thinking regarding financial success?
A.Client
B.Planner
C.Client & Planner
Solution: The correct answer is A.
When it comes to choice architecture, a financial planner should do all of the following except:
A.Put the client’s best interest first
B.Offer every option available to ensure the client makes an informed decision
C.Design an environment that encourages the client’s freedom of choice
D.Frame choices around the client’s goals
Solution: The correct answer is B.
Choice architecture refers to the manner in which a planner presents choices to a client and how it influences the decision-maker. A planner shouldn’t present every possible option since this approach will likely overwhelm the client and lead to no action being taken.
The other three statements are all true.
You have been working with your client, Brenda, for 3 months now. You developed a mission statement, goals, and objectives with the client. You are now constructing a plan that is led by the client’s mission statement. Which approach to financial planning are you utilizing?
A.Life Cycle Approach
B.Strategic Approach
C.Three Panel Approach
D.Metrics Approach
Solution: The correct answer is B.
The strategic approach is led by the client’s mission statement. The life cycle approach utilizes quick and simple data collection in a nonthreatening way permitting the financial planner to quickly focus on expected needs. The metrics approach utilizes qualitative benchmarks to determine where a client should be. The three panel approach compares the client’s actual financial situation with benchmark criteria.
During your work with your new client, Eliana, you created several visual representations of how your client spends her money. Which approach to financial planning are you utilizing?
A.Pie Chart Approach
B.Cash Flow Approach
C.Financial Statement Approach
D.Metrics Approach
Solution: The correct answer is A.
The pie chart approach provides a visual representation of how the client spends her money. The cash flow approach takes an income statement approach to recommendations. The financial statement approach helps establish where the client is today and uses ratio analysis to determine the client’s weaknesses and strengths. The metrics approach utilizes quantitative benchmarks to determine where a client should be.
Utilizing the three panel approach, which of the following would be evaluated in Panel 1 - Risk Management?
A.Emergency Fund
B.Education fund
C.Retirement Fund
D.Life Insurance
Solution: The correct answer is D.
Life insurance would be evaluated as part of Panel 1 - Risk Management. The emergency fund would be evaluated as part of Panel 2 - Short Term Savings and Investment. The education and retirement funds would be evaluated as part of the Panel 3 - Long Term Savings.
Craig’s financial planner is preparing his balance sheet. Which of the following would not generally be considered an “investment asset?”
A.Cash value in life insurance.
B.Money market account.
C.Certificate of deposit with a 18-month maturity.
D.401(K) account.
Solution: The correct answer is B.
The cash value in life insurance is generally considered an investment asset except when the client intends to withdraw it within the year. Since the CD matures in more than 12 months, it is also considered an investment asset.
What step should the financial planner do after gathering all the client’s qualitative and quantitative financial information and addressing any incomplete information?
A.Establishing and defining the client relationship.
B.Developing the financial plan recommendations.
C.Identify and select goals with the client.
D.Implement the financial plan recommendations.
Solution: The correct answer is C.
Which of the following statements concerning income and expenses listed on the Income Statement is correct?
A.Charitable contributions are always a discretionary expense.
B.Employer matching contributions are not reported on the income statement.
C.A mortgage payment is an example of a variable expense.
D.Social Security taxes withheld is an example of a variable expense.
Solution: The correct answer is B.
Social Security taxes withheld is an example of fixed expenses. Charitable contributions may be either discretionary or non-discretionary expenses depending on the client’s perspective. Employer matching contributions are not reported on the income statement. A mortgage payment is an example of a fixed expense.
Instructor Note: B is a true statement, this coursework does not cover corporate accounting.
What is the maximum potential gift tax free contribution to a 529 Plan in the current year, if grandparents elect gift-splitting?
A.$19,000
B.$38,000
C.$95,000
D.$190,000
Solution: The correct answer is D.
$19,000 × 2 × 5 = $190,000
Annual exclusion × 2 for gift splitting × 5 year pro ration.
A state 529 program may take more than $190,000.
The given answer ($190,000) is only correct if the grandparents have not made any other contributions within the last 5 years.
A is incorrect as it reflects the annual exclusion amount in 2025.
B is incorrect as it reflects the annual exclusion amount as a gift split.
C is incorrect as it reflects a 5-year front loading amount for an individual, not from both grandparents.
All of the following statements are true, except?
A.The American Opportunity credit is available for the first four years of a degree program or certificate.
B.The American Opportunity credit does not include course materials.
C.The American Opportunity credit is awarded on a per student basis.
D.The Lifetime Learning credit is awarded on a per family basis.
Solution: The correct answer is B.
The American Opportunity credit now includes course materials.
The American Opportunity credit is per student.
The Lifetime Learning credit is per family.
The following type of financial aid is awarded to students with a low SAI (formerly EFC) and are funds guaranteed to be available if a student qualifies financially:
A.Pell Grant
B.Plus Loan
C.Work Study
D.Stafford Loan
Solution: The correct answer is A.
Pell Grants are always available if a student qualifies.
Will is a freshman at Florida State University where his tuition is $4,000. Sydney, his older sister, is a junior at Expensive University, where tuition is $25,000. What is the maximum tax credit Will and Sydney’s parents can take?
A.$2,000
B.$3,800
C.$4,000
D.$5,000
Solution: The correct answer is D.
Will = American Opportunity= $2,500
2,000 × 100% = 2,000
2,000 × 25% = 500
Sydney = American Opportunity = $2,500
2,000 × 100% = 2,000
2,000 × 25% = 500
All of the following statements concerning financial aid programs for education funding are correct EXCEPT:
A.A Pell Grant is a grant from the federal government awarded to undergraduate students who have not earned a bachelors or professional degree.
B.The SAI calculation (formerly EFC), which is based on one’s ACT score, is used to determine a student’s eligibility for a Pell Grant and how much is awarded to a student.
C.One type of Stafford Loan is the Direct Stafford Loan that is provided to the student directly from the Department of Education.
D.One type of Stafford Loan is the FFEL Stafford Loan where funds are lent to the student through a lender (such as a bank or other approved financial institution) that participates in the FFEL program.
E.An unsubsidized Stafford Loan is one in which the borrower is charged interest on the principal from the moment of disbursement until the loan is paid off.
Solution: The correct answer is B.
The SAI calculation, which is based on one’s financial need, is used to determine a student’s eligibility for a Pell Grant and how much is awarded to a student.
All of the following statements concerning educational funding is correct EXCEPT:
A.A student must submit a FAFSA (Free Application for Federal Student Aid) form to become eligible for federal financial aid.
B.The SAI (Student Aid Index) is a formula that indicates how much of a student’s family’s resources ought to be available to assist in paying for the student’s college education.
C.Factors used in calculating the SAI include taxable and nontaxable income, assets, and benefits such as unemployment and Social Security.
D.The income and assets of the student’s family will only be counted if the student is considered dependent on the parents.
E.529 Savings Plans are treated as assets of the child in calculating the SAI.
Solution: The correct answer is E.
529 Savings plans are considered assets of the parent if owned by the parent or the child. When owned by a third party, the assets are not included in the SAI calculation.
Which of the following would cause the demand curve to shift to the right?
A.Increased savings rate
B.Decrease tax rate
C.Price change
D.More suppliers
Solution: The correct answer is B.
Anytime consumers have more money in their pocket, the demand curve is going to shift up and to the right. A decrease in the tax rate puts more spending money in the consumer’s pocket.
An increase in the savings rate puts less spending money in the consumers pocket and will cause the demand curve to shift down and to the left.
If the price of movie tickets decreases by a small amount, but there is a significantly large increase in demand, what can be said about the demand?
A.Elastic
B.Inelastic
C.Change in quantity demanded
D.Change in demand
Solution: The correct answer is A.
Draw a graph of elastic demand, horizontal and sloping down and to the right.
If demand is inelastic, then demand does not change much for changes in price. Draw inelastic demand as almost a vertical line.