FIN Chapter 1
2.3 Larry hopes to buy a house in 7 years. He currently has $75,000 saved. How much must he earn in interest, on an annualized basis, to purchase a house valued at $150,000? (Round your answer.)
10.4 percent SOLUTION: N = 7; PV = $75,000; FV $150,000; I/Y = 10.41%.
Steven earns $7280 per month. His monthly expenses include: $1000 in rent, $950 in recreational expenses, $470 in food, $350 in auto payments, $250 in gas and maintenance, $700 in student loan repayments, $260 in credit card payments, and $1840 in miscellaneous expenses. Assuming Steven saves his monthly surplus, what is his approximate savings rate? (Round answers to 2 decimal places, e.g. 52.75.)
20.05% $7280 - monthly expenses; then divided solution by 7280 1460/7280=20.05%
1.2 Which of the following statements about a person's health and wealth is false?
Unhealthy people may be forced to retire earlier than planned, which will reduce income and wealth accumulation
2.4 What is the formula for net worth?
assets - liabilities
1.5 Having bills automatically paid so you are never late when making a payment is an example of:
automating good decisions
Daniel recently sold an investment for $1360. He purchased the investment for $1060 two years ago. Daniel is single and has total taxable income of $25700. What is Daniel's tax on the gain on his investment?
$0
Angelica (23 years old) studied dance in college and graduated a year ago. She currently works as a dance instructor at a high school for the arts. Her gross pay is $40,000 a year, or $3,333 a month. After taxes, health insurance, and other paycheck deductions, her net pay is $32,800 a year. The transmission on her old car just broke, and it will cost several thousand dollars to repair. She decides that it is time to purchase a new car. She does not have sufficient savings to buy a car outright, so she is planning on getting a car loan to make the purchase. She has monthly student loan payments of $342 and monthly rent of $750. Jill would like to keep her total debt-to-income ratio equal to or below the recommended level. What is the maximum amount her monthly car loan payment can be so that her total debt-to-income ratio is equal to or below the recommended limit?
$108 monthly car loan payment -recommends to stay below 36% 342+750= 1092/3333 = 0.3276 ?
Patricia is single and has taxable income of $13000. What is the tax on her taxable income? (Round answers to 2 decimal places, e.g. 52.75.)
$1369.50 13000-9525=3475 .12x3475= 417 417+952.50=1369.50
2.3 What is the future value of $100,000 if you can earn 9% on an annual basis for 9 years? (Round your answer.)
$217,189 PV = $100,000 I/Y = .09 N = 9 FV = $217,189. FV=PV(1+I)^N
2.3 John is in the market for a used car. He has found the same sports car at two different dealerships and is now considering from which dealer he should purchase the car. Dealer 1 requires John to get the loan through its lending department. Dealer 1 has told John that, because the dealership does its own financing, it can get John the very best loan possible and John will only have to pay $247 per month for 60 months (5 years). Dealer 2 is selling the car for $12,000. Dealer 2 has told John he can use its financing or get his own lender, so John talked with his bank and learned that he can get a 5-year car loan for 4.9% APR. Dealer 2 has also offered John a 5-year loan for 5.9%. Based on these loan options, is Dealer 1's loan payment offer of $247 per month John's best deal? What is the lowest monthly loan payment John could get if the purchase price of the car is $17,000?
$226 per month for 60 months from John's bank SOLUTION: Dealer 1: PMT = 247; N = 60; PMT = 247 Bank: PV = $12,000; I/Y = 4.9/12 or .4083; N = 60; PMT = $226 Dealer 2: PV = $12,000; I/Y = 5.9/12 or .4917; N = 60; PMT = $231
Matthew works for a cookie company downtown. He earns $5 per hour. In a typical week, he works 21 hours. His employer provides overtime pay equal to 2 times his normal wage if he works past 40 hours. The company also provides a 12% commission on all cookies sold. How much can Matthew make this week if he works 30 hours and sells $1150 worth of cookies?
$288 5*30 = 150 1150*.12 = 138 150 + 138 = 288
Assume Mary earns $7.00 per hour. If she receives "time and a half" for any hours worked over 40 per week, how much will Mary earn if she works 45 hours this week?
$332.50 7*40 = 280 7+3.50 = 10.5*5 = 52.5 280 + 52.5 = 332.50
Karen (25 years old) studied music education in college and graduated a year ago. She currently works as a music teacher at a year-round private middle school. Her gross pay is $38400 a year, or $3200 a month. After taxes, health insurance, and other paycheck deductions, her net pay is $34500 a year. Based on recommended guidelines, how much money should Karen be saving each month?
$384 per month 3200*.12 (recommended savings rate for people under 30)
2.4 Marcus has the following financial resources, assets, and liabilities: $4,000 Mazda Miata, $3,000 in computer equipment, $8,000 in earnings, $2,000 in credit card bills, and $1,000 in student loans. What is Marcus's net worth?
$4,000 $4000+$3000-$2000-$1000=$4000
2.3 Assume your employer offers a bonus of $7,500. The only catch is that you must wait 6 years to take possession of the money. If you can earn 4% on your savings, what is the minimum you would take today to match the bonus? (Round your answer.)
$5,900 FV = $7,500 N = 6 I/Y = .04 PV = $5,927 rounded to $5,900 PV=FV/(1+I)^N
1.1 Which of the following strategies is most likely to increase your confidence about your financial future?
-Applying your financial knowledge -Organizing your finances to achieve your personal goals
2.4 Jorge's assets and liabilities are listed below. Cash: $500 Clothes and furnishing: $5,000 Car: $15,000 Investments: $50,000 Credit card bills: $300 Car loan: $5,000 Student loan: $12,000 What is Jorge's current ratio?
1.67 $500/$300= 1.67
2.2 Because of the TVM concepts learned in this topic, you should _________ receiving $1,000 in 1 year if given the opportunity to receive $1,000 in 2 years from today.
prefer
1.4 Which of the following is an example of an external motivation factor?
receiving a bonus
Brian earns $8000 per month. His monthly expenses include $1000 in rent, $900 in recreational expenses, $440 in food, $410 in auto payments, $280 in gas and maintenance, $900 in student loan repayments, $280 in credit card payments, and $1850 in miscellaneous expenses. What is Brian's debt to income ratio?
32% 1000+410+900+280=2590 (2590/8000) * 100 = 32%
The highest federal marginal income tax bracket rate on earned income in the United States is:
37%
1.4 Based on findings from the marshmallow test, about what percentage of Americans fall prey to time temptation (i.e., not willing to wait)?
70%
Edward has gross income of $54500. Edward has taxable income of $37500 and paid taxes of $4360. What is Edward's effective tax rate? (Round answers to 1 decimal place, e.g. 52.7. Hint: Effective tax rate is the average tax paid. It is calculated using the formula : (Total Federal Taxes divided by Tax Payer's Total Income ) Multiplied By 100
8.0% (total federal taxes/taxpayer's total income) x 100 (54500/4360) x 100 = 8.0%
Who is more likely to be paid a wage?
A high school graduate
If Susan has a surplus of $4800 per year and chooses to save that surplus for her future, needs, how much wealth will her surplus savings be worth after 20 years if she can earn a 12% rate of return?
Approximately $345852
What percentage of households in the United States have a negative effective income tax rate?
Approximately 40%
1.4 When asked, Sancho strongly agrees with the following statement: "I often think of what I should have done differently in my life." Given his answer, Sancho most likely holds what type of time perspective?
past
Ana runs a small jewelry-making business from her home. She has no full-time employees, but she does pay her son (age 15) to help package and ship products. Over the holidays, Ana and her son put in many hours to meet rush orders. In fact, over the holiday break, her son logged about 60 hours of work. Typically, Ana pays her son $5 per hour. Which of the following is true in relation to this case?
Because he is employed by his family, he is not entitled to extra pay or overtime pay.
1.2 Which of the following statements is true?
Converting human capital to financial wealth depends on wise planning and management
1.5 Creating deadlines for yourself is an example of what type of decision-making strategy?
pre-committing to decisions
2.1 Which of the following is a better deal if you want to maximize the return on your savings?
Earning a periodic interest rate of 1.25% compounded semiannually
Yolinda and Wes decide to go into business together. What form of partnership arrangement can they use to limit their individual and joint liability?
Either a limited liability partnership or a limited liability company
2.3 Davis has received a college scholarship and can choose whether to receive it as an immediate one-time payment of $10,000 or as a series of four equal payments (at the end of each year), each totaling $3,000. Assume that Davis secures a discount rate of 9%. Only considering TVM principles, which option is most valuable to Davis?
He should take an immediate payment of $10,000. The payment option results in a lower present value: PMT = $3,000 I/Y = .09 N = 4 PV = $9,719. PV AD= PMT/1 x [1- 1/(1+I)^N] x (1+I)
1.4 Which of the following is the reason those with a short-term time horizon should be cautious when investing their assets?
If the value of the assets were to fall, there may not be enough time to recoup the loss
1.2 Lance is 25 years old, well-educated, and a smoker. Rob is 35 years old, well-educated, and regularly texts while driving. Tammy is 40 years old, well-educated, drinks a glass of orange juice daily, and exercises regularly. Who has the most human capital potential?
Tammy
Which of the following are potential liabilities associated with business ownership?
Taxes, Debts, and Lawsuits (all three)
1.3 Terry loves to ski, play competitive dodgeball, and go mountain climbing. If asked, Terry would consider sky diving as a hobby. Which of the following statements about Terry is true?
It is impossible to know what Terry's financial risk tolerance is given the information provided
1.1 Which of following people is most likely to be considered financially knowledgeable?
Michelle, who gives regularly to charity, reads about investing, and is self-confident
1.2 Mike earned his bachelor's degree in history 3 years ago and started working shortly thereafter as a teacher. Michelle earned her high school degree 5 years ago and took a job right out of school. Maria earned her associate's degree last year and started work right after graduation. During the next economic recession, who is generally most likely to be unemployed?
Mike
1.4 Which of the following statements is true?
Most Americans naturally tend to hold a future time orientation
1.5 Which of the following is an example of a heuristic?
Never buy stocks on a Monday
1.4 Arnold rarely thinks about his future. He loves to work out and spend time with friends living in the moment. Given his orientation, which of the following best describes Arnold's time orientation?
Present-hedonistic
2.1 Who is more likely to amass greater wealth?
Ravi, who earns 8% interest over a 10-year period
1.2 Nick, a skilled welder, had been working for 12 years in a factory that recently closed. This has caused high unemployment in his town and region. If Nick is concerned about maximizing his human capital and lifetime wealth accumulation, which action would be most beneficial?
Relocate to a place where his welding skills will be valued in the marketplace
1.2 Takashi is a foreign-exchange engineering student. His English skills are limited but given his major in college, this has not been a big problem. Jorge is also a foreign-exchange student. He is studying finance and is active in his fraternity. Kim is not enrolled in college. She works 40 to 50 hours a week as a warehouse supervisor; when she is not working, she prefers reading books. Who is most likely to have the highest social capital today and in the future?
Takashi
1.4 When viewing general life outcomes, who is more likely to fare better in the future?
Those who resist temptation today
2.4 Which of the following statements is true?
The greater the debt ratio, the worse the financial situation.
1.3 Which of the following relationships accurately describes the role of financial risk-taking and wealth accumulation?
The greater the return required, the greater the risk that must be taken
1.3 Who is most likely to accumulate more wealth?
The person who is willing to take risk after adequate research
1.3 What helps explain why some people play the lottery even when they know the odds of winning are astronomically low?
They have a relatively low level of financial literacy and they view playing the lottery as a form of entertainment
Sheryl would like to adjust the amount of income tax withheld from her paycheck. She should contact her employer and fill out a new:
W-4 form
1.2 ___________ connects you with people with whom you would not usually socialize.
a formal network
1.3 Recently, a major fast-food chain saw its sales drop dramatically after the media reported that hundreds of people got sick eating at one location. In fact, sales across the country fell although competing chains saw no change in sales. This can be attributed to:
a general change in perceptions about the chain's quality of food
2.2 The difference between an annuity and an annuity due is that an annuity due is:
a series of payments occurring at the beginning of the month
1.1 Which of the following is most clearly a personal financial strength?
a willingness to save money on a regular basis
2.2 Alexis is considering taking out a loan to purchase a car. She'd like to know how much her payment would be if she borrowed $10,000 for 5 years at 4% interest. What TVM tool should Alexis use?
amortization schedule
2.1 When comparing loan offers, you should use the:
annual percentage rate
1.1 People who ___________ are less likely to feel that they are in control of their financial future.
believe strongly in luck and fate
1.5 Someone who erroneously attributes outcomes to skill rather than chance, while ignoring indications that would undermine perceptions of skill, is prone to:
confirmatory bias
1.1 What is the single largest component of the U.S. GDP?
consumer spending
1.5 Your friend Lucia is a procrastinator. How can you best help her overcome this weakness?
create deadlines
2.1 Given the choice, it is preferable to earn interest that is compounded
daily
Toward the end of your career, your human capital tends to ___________________, whereas your assets tend to ______________.
decrease; increase
Emily invested $100,000 into a startup company this year. For the first time, she received a payment from the company for $3,000. The $3,000 is called a(n):
dividend
A nonrefundable tax credit is one that may:
eliminate your tax liability
2.2 Sharon wants to know how much money she will have saved for retirement if she saves $300 per month for the next 20 years and earns 8% interest each year. Sharon is looking for the:
failure value of an annuity
2.2 James is wondering how much money he needs to have to receive an annuity payment of $10,000 per month for 30 years, after which time the payments will stop and his investment will be used up. James believes he can earn 6% on his investments. How many TVM inputs does James need to solve this problem?
four inputs (the interest rate, and time period, and payment amount, and present value)
1.3 Low-risk investments most often:
generate the lowest returns
1.1 Now that Graham has graduated college, he is facing several changes in his life. He was recently married and started a new job in a large city . Which of the following events is going to have the highest cost over Graham's life?
having and raising a child
1.4 Short-term financial goals:
help you reach your long-term goals
Jane just got her first paycheck. How does she know if she is considered to be an employee of a firm?
her paycheck with holds FLCA taxes
1.1 Financial knowledge refers to:
how well you understand personal finance information
1.2 Your ability to earn money over the working lifetime is called:
human capital
2.1 The power of compound interest refers to:
interest being reinvested and earning additional interest
Which of the following items is included in gross income?
interest earned on savings account
Someone who takes risks with his/her money by buying assets or shares in a company in hopes of receiving unearned income in the form of dividends is called a(n):
investor
When you deposit money into a bank account, you are considered a(n)?
lender
1.4 Bud is 43 years old. He would like to retire at age 67 and move to the Caribbean. What is Bud's goal time horizon?
long term
1.5 Jerry recently earned $200 on an investment. Unfortunately, the investment fell in value, and he lost $200. Afterward, Jerry felt miserable. He hated losing the money much more than he enjoyed seeing the investment grow. Jerry's experience is an example of:
loss aversion
The Retirement Savings Contribution Credit is designed to help which individual(s) save for retirement?
middle- and lower- households
1.1 Nigel believes that most "rich people" obtained their wealth either through hard work or by investing wisely. Assuming Nigel adopts this same perspective as a guide to his own spending and saving behavior, he is most likely to become:
more knowledgeable about the financial marketplace over time and increase his personal wealth
1.3 Nellie just took a risk-tolerance quiz online and learned that her risk tolerance is in the bottom 10% of all those who have taken the quiz. She should:
not be worried because her risk tolerance will increase as her knowledge and experience increase
1.3 Financial risk tolerance can be considered:
on a scale that can change over time
1.2 Ruby, age 50, is considering going back to school. She would like to retire at age 67. She currently earns $50,000 per year. If she goes back to college and completes a graduate degree, she will earn $55,000 per year. If the total cost of the graduate degree is $75,000, Ruby should:
only go back to school if the time and effort will result in an increase in personal satisfaction and fulfillment
1.5 Swarn is a risk-taker. His core life philosophy is that nothing bad can happen to him. When he thinks back over his life, he can't remember any serious negative events. When he looks ahead, he simply can't imagine a painful loss occurring to him. Swarn likely suffers from a(n):
optimism bias
1.2 Barbara is considering two career and educational options, both of which she is excited about. Both options would cost approximately $86,000 in tuition, room, living expenses, books, travel, and fees. Pursuing Option 1 would lead to a job after graduation earning approximately $35,000 per year. Option 2 would lead to a job after graduation earning approximately $40,000 per year. Based on this information, which option has the shortest payback period?
option 2
Yolinda and Wes decide to go into business together. They are excited to get started immediately. Which of the following forms of business can they use when establishing their company?
partnership
1.3 Given a choice, John would like to invest in a safe and secure investment compared to investing in the stock market. This is an example of John's:
risk preference
1.3 When Todd thinks of investing in the stock market, he equates the action with terms like loss, risk, and danger. This is an example of Todd's:
risk preference
An administrative worker who does not generally receive overtime pay is likely paid a:
salary
1.5 Melinda can take $500 today, or she can wait 1 year and receive $550. The good news is that Melinda does not need the money, so either way the money is a bonus. If she takes the money today, she'll put it in the bank and receive a 3% rate of return (so she would have a total of $515 a year from now). If Melinda does, in fact, take the $500 today, you could say that:
she feels that the likelihood of getting the full $550 is less than getting a guaranteed $515
The easiest type of business to start is a:
sole proprietorship
1.4 "I want to retire with $1,000,000 in the bank" represents what element of a SMART goal?
specific
1.5 Some firms entice consumers into long-term contracts using low introductory rates. Once the initial contract term has ended, the firm increases the cost of the service. Firms know that few consumers leave when the prices increase. These firms are relying on what behavioral economics bias?
status quo
1.5 Mary sees no reason to change if what she is doing has worked in the past. Given her perspective, Mary may be exhibiting a(n):
status quo basis
For federal income tax purposes, ____________ is equal to the tax base.
taxable income
George has the following sources of income: $4030 from his job; $990 in unemployment insurance; $2440 from the sale of his motorcycle; and $100 in birthday gifts. Which of these sources is not considered unearned income?
the $4030 from his job
1.1 In the short term, what might happen if all Americans suddenly learned the foundational concepts of personal finance--they borrowed less, saved more, and spent less--and changed their behavior immediately?
the GPD would fall because consumers would spend less on goods and services
2.4 Haley owns a Honda Civic. She is creating her balance sheet and needs to input a value for the car. Which of the following is an indication of the car's fair market value?
the trade-in value of the car
1.1 The way you view the financial world is shaped most profoundly by:
your financial knowledge, financial risk taking, and feelings of control over your situation