FINC 2400 Chapter 1

List the six components of a financial plan.

(a) Budgeting and tax planning (b) Managing liquidity (c) Financing your large purchases (d) Protecting your assets and income (e) Investing your money (f) Planning your retirement and estate

From a financial standpoint when should a person start retirement planning and saving? A) When he or she first starts receiving a salary B) At 45-50 years of age C) At 50-55 years of age D) At 55-60 years of age

A

Retirement planning should begin A) as early as possible in order that you accumulate sufficient funds for retirement. B) as soon as you start working full time. C) a few years before you plan on retiring. D) you do not need to plan since social security and your firm's pension will be sufficient.

A

The act of determining how wealth will be distributed before or upon death is A) estate planning. B) retirement planning. C) not needed for most people. D) liquidity planning

A

The first step in developing your financial plan is A) establish your financial goals. B) pay off all your credit cards. C) buy a cool car then begin saving money. D) get a good job.

A

A personal financial plan specifies financial goals and describes A) saving, investing, and asset valuation. B) spending, saving, and credit card financing. C) spending, financing, and investment plans. D) saving and spending only.

C

After your financial plan is developed it should be A) locked in a safe for keeping so it isn't stolen. B) reviewed every five years. C) monitored and updated annually. D) sold to others.

C

All of the following are true with regard to the demand for financial advisers except A) many people lack an understanding of personal finance. B) many people prefer to rely on advisers rather than making their own decision. C) many people are just not interested in making their own financial decisions. D) the law requires that you use advisers before making investments.

C

Goals with a time frame of between one and five years are classified as

C

In the United States the level of savings is about A) 50% of income earned. B) 25% of income earned. C) 4.5% of income earned. D) less than 1% of income earned.

C

When estimating expenses for a budget, A) last month's and last year's expenses are not a good starting point. B) many of the same expenses do not occur each month. C) large unusual expenses such as car or hospital bills should be included. D) estimating your future assets is a good starting point.

C

Effective estate planning will ensure that your wealth is distributed according to your wishes, but will do nothing to reduce the potential taxes your estate is subject to.

FALSE

Goals with a time frame of five or more years into the future are called intermediate-term goals.

FALSE

If prepared properly, financial plans are set for life and should not need to be adjusted.

FALSE

Liquidity cannot be enhanced using sound money and credit management.

FALSE

Money management decisions include deciding how much credit to obtain to support your spending and what sources of credit to use.

FALSE

If you do not have access to money to cover cash needs, you may have insufficient liquidity.

TRUE

Estate planning A) protects your wealth against unnecessary taxes. B) shelters your wealth against all taxes. C) ensures that your wealth is distributed in the manner that the court determines. D) involves saving to purchase a large country estate.

A

Which of the following is an example of money management? A) Putting your money in a savings account at your bank B) Shopping around for the credit card with the best interest rate C) Deciding to delay buying a new car until you can pay cash D) Paying off a loan early to reduce the interest charges

A

Which of the following is not a financing decision? A) Should you buy Apple stock with savings B) Should you lease a car C) Should you take a loan and buy a car D) Should you take a 15 or 30 year mortgage to buy a house

A

Which of the following is not a reason to set realistic financial goals? A) So you have something to refer to every time you get paid B) So you have a high likelihood of achieving them C) If the goal is too onerous you will be unwilling to follow the plan D) If you fail you will be discouraged and lose interest in planning

A

Which of the following is not a relevant consideration when identifying alternatives for achieving your financial goals? A) Choosing a large versus small university B) Pursuing additional education C) Choosing a state versus private university D) Choosing a major for study that enhances earning power

A

Why is it important to understand how taxes impact your personal financial planning? A) Taxes paid reduce your net income and cash flow available to save as well as the returns on your investments. B) Not paying taxes can result in penalties and jail time. C) It is not that important since savings are not taxable. D) It is only important if you are in a 25%+ tax bracket.

A

Amanda has cash of $100, a car worth $5,000, and books worth $200. Her liabilities include a car loan of $2,000 and a credit card balance of $100. What is the total of her assets, liabilities, and net worth?

Answer: Assets of $5,300, liabilities of $2,100, and a net worth of $3,200.

A worker making $20 per hour decides to take a day of unpaid leave from work to attend a graduation ceremony. The worker ordinarily works and 8-hour day and is subjected to a total tax rate of 20%. What is the worker's total opportunity cost from the day of unpaid leave? A) $8.00 B) $128.00 C) $112.00 D) $160.00

Answer: B Explanation: B) $160 × 5% = $8; $160 × 70% = $112; $112 + $8 = $120

Jakob received a $1,000 a year raise in January, sold stocks in March for $6,000 that were originally purchased for $4,000, and in July had a $100 monthly increase in mortgage payments on his adjustable rate mortgage. The increased mortgage payment started in July and was in effect for the remainder of the year. What was the total impact on Jakob's cash flow for the year? A) $1,000 B) $5,400 C) $6,400 D) $7,600 Answer: C

Answer: C Explanation: C) Raise $1,000 Sale of stock $6,000 Increased mortgage payments (600) Net cash inflows $6,400

By establishing high and unrealistic financial goals, you will probably A) improve the likelihood of achieving at least some success. B) become discouraged and lose interest in planning. C) increase the viability of your plan. D) impress your spouse or significant other.

B

Opportunity cost refers to A) money needed for major consumer purchases. B) what you give up or forego as a result of making a decision. C) the amount paid for taxes when a purchase is made. D) evaluating different alternatives for financial decisions.

B

Since career choices affect your income, you should choose the career that A) that pays the highest salary even if you dislike the work. B) that will be enjoyable and will suit your skills. C) that will be the easiest to find employment in. D) that requires the least amount of training or education so you can begin working as quickly as possible.

B

Which of the following is an example of an opportunity cost? A) Renting an apartment near school B) Taking a class instead of working at your part-time job C) Setting aside money for paying income tax D) Purchasing automobile insurance

B

Which of the following is not a decision involved in managing your liquidity? A) Deciding how much money to keep in savings B) Choosing between credit cards C) Determining how much money to save versus how much to spend D) Building and maintaining a monthly/yearly budget with allocations to expenses and investments

B

Which of these statements is true with regards to the 2008-2009 financial crisis? A) More than half of the people in the United States lost their jobs. B) The values of many homes were cut in half or more. C) The values of most investments declined by no more than 10%. D) Having a financial plan is of no help when economic conditions are as weak as they were during the crisis.

B

________ management involves decisions regarding how much money to retain in a liquid form and how to allocate funds among short-term investment instruments. A) Investment B) Money C) Credit D) Liquidity

B

Which of the following goals would be easiest to measure? A) Reduce debt payments B) Save funds for an annual vacation C) Save $100 a month to create a $4,000 emergency fund D) Invest for a comfortable retirement

C

Which of the following is a credit management decision? A) Purchasing a used car with cash B) Investing your savings in the stock market C) Obtaining a student loan to attend college D) Putting money into your retirement account

C

Which of the following is an example of an opportunity cost? A) Depositing money into a savings account so you will be able to pay cash for holiday gifts B) Buying a car which depletes your savings C) Giving up going to a movie in order to study for your finance exam D) Purchasing a new computer

C

Which of the following would not help protect you from unethical or incompetent advice from a financial adviser? A) Educating yourself on various financial products B) Asking questions of other clients C) Relying on the adviser as to when to buy and sell D) Knowing your risk tolerance

C

________ management involves decisions regarding how much credit you need to support spending and which sources of credit to use. A) Investment B) Money C) Credit D) Liquidity

C

Josh has decided to take a course at the local community college that could help him get a promotion at work. The course begins at 5 p.m. and goes until 9 p.m. on Monday nights. Josh normally works until 5 p.m. each day, but because of the drive time to the community college, he will need to leave work at 3 p.m. on class days. Josh currently earns $18.50 per hour. His employer contributes 10% of Josh's gross earnings to a 401(k) retirement plan. If the class meets 16 times, what is Josh's total opportunity cost for the class? A) $592.00 B) $800.00 C) $651.20 D) None

C 2 hours × $18.50 = $37.00 × 10%+ $3.70; $37.00 + $3.70 = $40.70/class × 16 classes = $651.20

Which of the following is not a decision involved in managing your financing? A) Whether to obtain a 3 year versus 4 year loan on a new car B) Whether to obtain a 15 year versus 30 year loan on a new home C) Whether to pay off an existing loan D) Whether to invest income in a savings account or in a stock

D

Which of the following is not a step in developing a financial plan? A) Establish your financial goals B) Consider your current financial position C) Identify and evaluate alternative plans that could achieve your goals D) Put your plan away for six months to a year and then review it for accuracy

D

Which of the following is not a way that insurance is designed to protect your wealth? A) Protecting the assets that you own B) Limiting your exposure to potential liabilities C) Protecting your income D) Protecting your investments from downturns in the stock market

D

Jessie has $4,000 in a bank account, $2,800 in a 401(k) plan at work, a car with a current value of $28,000, and a house that she purchased for $92,000 that has a current value of $118,000. The current balance of her home mortgage is $81,000, she has one credit card with a $3,000 balance, and a school loan with a balance of $6,000. What is Jessie's current net worth? A) $62,800 B) $46,800 C) ($242,800) D) ($62,800)

Explanation: A) $4,000 + $2,800 + $28,000 + $118,000 = $152,800 $3,000 + $81,000 + $6,000 = $90,000 Net worth $62,800

) A complete financial plan consists of budgeting, taxes, financing, and investing

FALSE

1) Most Americans will never be able to understand and develop a personal financial plan.

FALSE

A good understanding of the financial planning process will allow you to make informed decisions without relying on the advice of financial advisors.

FALSE