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Finance 201 > Midterm 4 Part 5 > Flashcards

Midterm 4 Part 5 Flashcards

1
Q

What does it mean to play volleyball when buying a house?

A

You’re negotiating a price back and forth

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2
Q

What should your official offer include?

A

Price and dates (payment plan)

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3
Q

What is a REPC?

A

Real Estate Purchase Contract
It provides the basic information needed to make an offer (your price and the dates). It gives the other party a chance to accept or reject the offer.

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4
Q

What is earnest money?

A

The buyer holds that money once you make an offer. If you walk away from the deal, you lose that money

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5
Q

True or False: The REPC also includes contingencies that will allow you to get the earnest money back

A

True

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6
Q

What are the three contingencies we talked about that will be listed in the REPC?

A
  1. Appraisal
  2. Funding
  3. Inspections
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7
Q

What are the three basic inspections you SHOULD do?

A
  1. Meth inspection
  2. Black mold
  3. Radon
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8
Q

Why is it so important to do inspections before buying the house?

A

Depending on the problem, they may have to knock your house down. You could lose everything. You could also lose hundreds of thousands of dollars to fix black mold or radon problems.

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9
Q

What does the appraisal contingency mean?

A

That if the appraisal does not equal the offer you can still back out of the deal without losing money.

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10
Q

What does the funding contingency mean?

A

That if you cannot get the funding for the purchase, you can back out of the deal without losing money.

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11
Q

True or False: You should have a prequal or preapproval before making an offer

A

Basically TRUE

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12
Q

What does a title insurance company do?

A

They handle all of the money and transactions. They hold the earnest money and they cut the checks.

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13
Q

True or False: A title insurance company will do all the paperwork and file your deed with the county

A

True

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14
Q

What is title insurance?

A

It makes sure that nobody from the past can make a claim on the property

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15
Q

Who buys title insurance for WHO?

A

The Seller has to buy TI for the buyer, and the buyer gives the TI to the lender

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16
Q

What is an incremental cash flow?

A

A cash flow that changes because of the project

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17
Q

What is an incidental cash flow?

A

A cash flow that is affected by a new project, but is not directly coming from that project.

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18
Q

What is CAFE?

A

Corporate average fuel economy

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19
Q

Two methods of figuring out how much something has depreciated

A

Straight line and MACRS

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20
Q

Why do we need to depreciate our assets?

A

So that it’s book value will match the market value for how much we can make for it (when we’re done with it)

We want book value to match market/salvage value

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21
Q

What does it mean to recapture part of the NWC?

A

That’s when you sell all the assets at the end of the project and make back part of the money you spent to get the project started

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22
Q

What part of depreciation is taxable?

A

The market - book

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23
Q

When solving for depreciation using the straight line method with 0 salvage value, what does the equation equal?

A

The amount of ANNUAL depreciation

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24
Q

What is another name for differential cash flows?

A

Incremental

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25
Q

True or False: You can depreciate sales tax

A

TRUE

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26
Q

True or False: Market value is just what somebody is willing to pay

A

True

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27
Q

Can you depreciate shipping and installation costs?

A

Yes

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28
Q

On the mini PNL, what number do we plug into either the straight line or MACRS?

A

The Depreciable asset line

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29
Q

How do we calculate the depreciable asset?

A

Purchase price of asset + shipping and installation costs

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30
Q

How do we calculate investment in working capital?

A

CA - CL

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31
Q

How many things are added/subtracted together to get the Net IO?

A

5, there are five lines.

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32
Q

When calculating the Net IO, do you need to subtract anything?

A

Nope, all addition

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33
Q

What is ATCF?

A

Net cash flow after taxes

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34
Q

What’s another name for sales?

A

Incremental revenue

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35
Q

What’s another name for expenses?

A

Incremental costs

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36
Q

How do we calculate the depreciation on a project?

A

Using MACRS or Straight line

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37
Q

True or False: EBT is taxable income

A

True

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38
Q

True or False: Net income, profit, and earnings after taxes all mean the same thing

A

True

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39
Q

What’s another name for depreciation reversal

A

FCF

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40
Q

How many lines or factors make up the calculation of differential cash flows?

A

7, there are 7 things you have to add/subtract together to equal the annual cash flow

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41
Q

How many lines or factors make up the calculation of the terminal cash flow?

A

3

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42
Q

What is a recapture of net working capital?

A

It is the % of your CA - CL that you earn back when you resell those things at the end of the project.

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43
Q

True or False: If Market Value > Book value, you pay taxes

A

True

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44
Q

Is earnest money the same thing as escrow?

A

Earnest money is kind of like a down payment to the seller. You give them money if you intend to purchase the house. Escrow is more like ANY money that is being held by a third party.

Earnest money is NOT held by a third party.

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45
Q

What is the difference between traditional and Roth IRAs?

A

Roth IRA’s deposit income that’s already been taxed. When you withdraw at retirement, you don’t owe taxes on it or on the growth.

Traditional IRA’s deposit income that has not been taxed yet. When you withdraw payments at retirement, you have to pay taxes on that money.

46
Q

What is a defined contribution plan?

A

Like a typical 401k plan. You contribute money and your employer contributes money. It is the money that YOU contributed to the fund that you can withdraw when you retire (in addition to interest)

47
Q

What is a defined benefit plan?

A

Basically a pension plan. It is NOT money that you contributed to some fund, it is money that comes from the government to pay you in your retirement (for services rendered during your working life).

48
Q

What is HELOC?

A

Home equity line of credit

You can borrow money from the bank using your house as collateral.

49
Q

True or False: When you own your home, you can borrow money from your lender against the line of equity (how much your house is worth) by using the value of your home as collateral

50
Q

How many mortgage companies should you shop for?

A

At least 3

51
Q

Why should you shop around for mortgage companies when buying a home?

A

Because they each have a different rate sheet

52
Q

True or False: If you get a pre-authorization letter, you have to choose that lender

53
Q

What are origination points?

A

Pure profit to the lender

54
Q

What are discount points?

A

They allow you to pay a fee now to get a lower rate.

55
Q

True or False: When shopping for mortgage rates, you want to have 0 origination and discount points to compare

56
Q

What are rebate points?

A

The lender pays you the money in exchange for a higher rate.

57
Q

When do rebate points come into play?

A

When you are doing a no cost streamline

58
Q

What is another name for rebate points?

A

Broker credits

59
Q

How can you find the “breakeven” number when doing a no cost streamline?

A

Use the amortization table in excel

60
Q

True or False: When doing the no cost streamline method, the broker should be adding the closing costs into the total loan

A

FALSE
They should be paying them and giving you a higher rate instead. You should NOT have to pay more.

61
Q

True or False: When choosing the no cost streamline loan, make sure the lender UNDERSTANDS that they are paying the money, not adding it in

62
Q

What is another name for home owner’s insurance?

A

Hazard insurance

63
Q

What are examples of prepaids?

A

Hazard insurance, property taxes, skipped interest payments, PMI

64
Q

What is PMI?

A

Private mortgage insurance

65
Q

How do you avoid PMI?

A

You need to own at least 20% of the house (by making a 20% down payment).

66
Q

What are prepaids?

A

Additional costs that are not included in closing costs

67
Q

What are examples of appropriate debt given by LDS prophets?

A
  1. Home (modest home)
  2. Education
  3. Business
  4. Transportation/car
68
Q

What is human capital?

A

YOUR marketability, your value and expertise that you bring to the company

69
Q

Examples of inappropriate debt?

A

Anything that’s not the big 4, all kinds of consumer and credit debt

70
Q

What is the FILO work principle?

A

First in, last out. Meaning that for the first few years of a new job, you’re the weakest link, so you make up the difference by working your tail off. You come in before everybody else, and you leave after everybody else.

71
Q

What is considered short term investing?

A

If you need the money within 5-10 years.

72
Q

What should you put your money into if you are short term investing?

A

Checking, savings, money markets, CD’s

73
Q

True or False: Bonds are a safe short term investment

74
Q

True or False: Putting money in FDIC banks is a safe short term investment

75
Q

What’s the best way to do long term investing?

A

Dollar cost averaging

76
Q

Should you use index funds or active management?

77
Q

How often does the index beat actively managed funds?

A

85% of the time

78
Q

What does the 85% index to active percent indicate?

A

That actively managed accounts are performing worse than the index and losing your money 85% of the time

79
Q

Why are index funds the best?

A

Because they track the market, they just follow the market.

80
Q

True or False: When you rely on a defined benefit or 401k plan, you have severe penalties if you withdraw early.

81
Q

Which tax-sheltered vehicle lets you withdraw your money after 5 years with no penalties?

82
Q

What are the investment assets in your retirement portfolio?

A

Whatever you want. Any type of asset you want to invest in based on the level of risk you’re willing to assume

83
Q

What does “random walk down wall street” mean?

A

It means incredible investors may be terrible next year. It’s impossible to forecast who is going to be able to invest well.

84
Q

How much money do you lose when you pay people to actively manage your investment money?

A

1/3 of all that you invest

85
Q

What do the numbers mean on the following index funds?
RUNS 2000
RAM 3000
WISH 5000
S&P 500

A

2000 = small index fund
3000 = mid range fund
5000 = whole fund
500 = A single company, but GREAT reputation, very small

86
Q

Define blue chip

A

Blue chip companies are well established, highly reputable companies that are publicly traded

87
Q

True or False: Bluechips are good

88
Q

What types of loads are required by actively managed funds?

A

Front end and back end

89
Q

What is a front end load?

A

It’s going to cost you some percentage to pay the broker to buy the stocks

90
Q

What is a back end load?

A

It’s going to cost you some percentage to pay the broker to sell the stocks

91
Q

Time Diversification

A

If you’re in stocks a long time, you won’t lose money. EVER. Play the long game

92
Q

What is the Fiduciary standard?

A

It means that everything they do is in the client’s best interest (as opposed to taking huge cuts for themselves)

93
Q

True or False: A CFP certified person is more likely to be required to live by the fiduciary standard

94
Q

True or False: The depreciation expense calculated from MACRS is a dollar amount

95
Q

True or False: If a company experiences a taxable loss from the sale of an asset, it experiences a tax shield that is counted as cash inflow

96
Q

What are the two types of taxes associated with additional earnings from projects, and how do you calculate them?

A
  1. Income tax, you just multiply your net income by the tax rate to find out how many taxes you owe
  2. Tax on sales of assets, use the (MV-BV)t equation
97
Q

What does ATCF stand for?

A

After tax cost of cash flows

98
Q

True or False: We are allowed to take out some debt to get a FIRST car, but not subsequent cars

99
Q

True or False: We can take out debt to get a modest home and pay off the mortgage quickly

100
Q

True or False: When paying back student loans, we should be willing to sacrifice and live frugally until the debt is gone

101
Q

True or False: When taking on debt as a business (or for a business) be prudent and wise. Do not borrow more than you can afford

102
Q

What are the four bullet points under Survival advice?

A
  1. Market yourself
  2. Lower your expectations for material things
  3. Refuse to be part of the entitlement generation
  4. Practice the FILO principle
103
Q

What is another name for the “survival advice?”

A

Human capital

104
Q

Examples of short term investments

A

Checking, saving, CD’s, money markets

105
Q

True or False: When investing in a bank, you should choose one that’s FDIC insured

106
Q

Examples of tax sheltered investment vehicles

A

Traditional IRA, Roth IRA, 401k, SEP IRA, 529 plans

107
Q

What makes investment vehicles tax-sheltered?

A

While the money is in the account/investment, it is not being taxed. The taxes come out either before the money is put in or after you take it out.

108
Q

What is the biggest consideration of a 401k plan?

A

GET THE MATCH

109
Q

True or False: Investment assets are INSIDE the investment vehicle

110
Q

What is a broad equity index fund?

A

A whole bunch of stocks being managed automatically, tracking the market

111
Q

Why are broad equity index funds so good?

A

Because stocks always outperform other assets, they’re safe in the long term, the fees for investing in active funds destroy wealth, and actively managed funds lose to index funds 85% of the time

112
Q

What are the 10 rules of Dave Ramsey blarg?

A
  1. Save 10-20% of income
  2. Pay credit card balance full every month
  3. Max out 401k and other investment vehicles
  4. Never buy/sell individual stocks (you can’t beat wallstreet)
  5. Buy well diversified index funds
  6. Finance advisor commits to fiduciary standard (CFP)
  7. Buy a modest home when ready
  8. Buy insurance for protection
  9. Support social safety net (medicare stuff)
  10. Remember these 10 rules

Finance 201 (18 decks)

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