AGLS 435 Quiz Questions + Exam 2 Questions Practice
Brandon buys a piece of equipment for $15,000. He pays $5,000 for upgrades in year 1 and the equipment generates $2,000 in cash flow for year 1. In year 2 the equipment generates $8,000, year 3 it generates $4,000, but Brandon sells it for $6,000 but also pays a $500 commission. What is his IRR? A. -1.18% B. 1.18% C. -0.8% D. 0.8%
-1.18% CF0=-15,000 CF1=-3,000 CF2=8,000 CF3=4,000+6,000-500=9,500 IRR?
Given a standard deviation of 7% and a mean of 11%, what is the range for 95% of possible results? A. -5% to 31% B. 4% to 22% C. -14% to 40% D. -3% to 25%
-3% to 25% (mean -2*Standard Deviation) to (mean +2*Standard Deviation)
Calculate the NPV of a machine that is purchased for $5,000, sold at the end of year 4 for $2,500, and produces the following cash flows: Year 1: $700 Year 2: $800 Year 3: $900 Year 4: $1,000 Assuming that the appropriate discount rate is 6%, what is the NPV? A. -99.64 B. 99.64 C. -2,079.87 D. 2,079.87
-99.64 5000 CHS CF0 700 CFj 800 CFj 900 CFj 1,000+2,500 CFj i=6 f NPV=-99.64
Jade is looking for an insurance policy for her home. Her friend, Shamus, who is an attorney, just told her that the policy is a contract and has some unique characteristics. Which of the following terms applies to the insurance contract? 1. Indemnity 2. Res ipsa loquitur 3. Adhesive A. 1 and 3 B. 2 only C. 2 and 3 D. 1,2 and 3
1 and 3
Which of the following statements is/are correct? 1. The principal but not the interest to be paid this year on a 30-year mortgage is properly classified on the Statement of Financial Position as a current liability. 2. A CD with a maturity of 9-months is classified as an investment asset on the Statement of Financial Position. A. 1 only B. 2 only C. Both 1 and 2 D. Neither 1 nor 2
1 only The current portion of long-term debt (principal only) is classified as a current liability. A CD due in 12 months or less is classified as cash and cash equivalents not an investment asset.
Steven, age 43, earns $80,000 annually; and his wage replacement ratio has been determined to be 80%. He expects inflation will average 3% for his entire life expectancy. He expects to work until 68, and live until 90. He anticipates an 8% return on his investments. Additionally, Social Security Administration has notified him that his annual retirement benefit, in today's dollars will be $26,000. Using the capital needs / annuity method, calculate how much capital Steven will need to be able to retire at age 68. A. 836,000 B. 1,760,000.00 C. 1,061,342.08 D. 1,112,863.56
1,112.863.56 Unsure how to do this one
Which of the following statements are consistent with the Developmental Paradigm? 1. The majority of humanistic theories view clients as experts on themselves. 2. Much of the Developmental approach has its origin in and was influenced by Freudianpsychoanalytic theory. 3. Counseling in the Developmental Paradigm has an overall aspiration to recount or correct earlier, disrupted development to foster change in the client or the client's behavior. A. 1 only B. 1 and 3 C. 1 and 2 D. 1,2, and 3
1,2 ,and 3
Which of the following statements regarding life insurance needs is / are correct? 1. The human life value approach looks forward for information 2. The capitalization of income approach looks at right now only for information 3. The needs approach looks at future needs of dependents but does not consider the estate that the decedent would have built had he lived A. 1 only B. 1 and 2 C. 1 and 3 D. 1,2, and 3
1,2, and 3 All statements are correct. The needs approach assumes no estate built during the life of the decedent.
Which of the following are advantages to being a shareholder: 1. The expected returns for equities are higher than debt securities. 2. Equities have prices listed on major exchanges and are marketable. 3. Equities typically earn their expected return. 4. Equities that do not pay a dividend are tax efficient. A. 1 and 3 B. 2 and 4 C. 1,2,and 4 D. 1,2,3, and 4
1,2, and 4 Choice 3 is not correct - Equities typically do not earn their expected return, which is what makes stock selection so difficult.
Steven, age 43, earns $80,000 annually ; and his wage replacement ratio has been determined to be 80%. He expects inflation will average 3% for his entire life expectancy. He expects to work until 68, and live until 90. He anticipates an 7% return on his investments. Additionally, Social Security Administration has notified him that his annual retirement benefit, in today's dollars will be $26,000. Using the capital preservation model, calculate how much Capital Steven needs, in order to retire at 68. A. 154,974.9475 B. 1,061,342.08 C. 1,480,473.20 D. 1,317,564.25
1,480,473.20 Beginning mode N=22 i=7 PMT=0 FV=1,207,846.37 Solve for PV=277,626.83 1,207,846.37+277,626.83=1,480,473.20
Steven, age 43, earns $80,000 annually; and his wage replacement ratio has been determined to be 80%. He expects inflation will average 3% for his entire life expectancy. He expects to work until 68, and live until 90. He anticipates an 8% return on his investments. Additionally, Social Security Administration has notified him that his annual retirement benefit, in today's dollars will be $26,000. Using the purchasing power preservation model, calculate how much capital Steven needs, in order to retire at 68. A. 1,061,342.08 B. 1,216,317.03 C. 1,317,564.25 D. 1,505,091.23
1,505,091.21 Unsure how to do this
Stephanie wanted to save for her daughter's education. Tuition costs $10,000 per year in today's dollars. Her daughter was born today and will go to school starting at age 18. She will go to school for 4 years. Stephanie can earn 12% on her investments and tuition inflation is 6%. How much must Stephanie save at the beginning of each year if she wants to make her last savings payment at the beginning of her daughter's first year of college? A. 1,889 B. 2,104 C. 2,389 D. 1,687
1,687 Step 1: Solve for NPV CF0=0 CF1-17=0 CF18-21=10,000 i=(1.12/1.06)-1 * 100=5.66 NPV ? = 13,696.05 Step 2: Solve for annual savings N=18 i=12 PV=13,696.05 PMTAD? FV=0
The Keller's discovered that they could reduce their mortgage interest rate from 10% to 4%. The value of homes in their neighborhood has been increasing at the rate of 5% annually. If the Keller's were to refinance their house with $3,000 in closing costs added to their current mortgage balance ($277,000) over a period of time which coincides with their chosen retirement age in 20 years, what would be their new monthly payment including principal and interest? A. 1,672.99 B. 1,678.56 C. 1,691.11 D. 1,696.74
1,696.74 PV=280,000 N=240 i=4/12 PMTOA=1,696.74
Your client, Tom, has come to you inquiring about retirement. He wants to know how much he needs to be saving at the end of each month to meet his goal. He is currently 45 and wants to work until age 64, and his estimated return on investment is 9%. He also has $250,000 in retirement savings already. You have calculated that he will need to have $2,413,545 saved by retirement to meet his goals. How much does Tom need to save at the end of each month to make this happen? A. 1,736 B. 2,112 C. 1,433 D. 1,512
1,736 Given the information above we must first calculate working life expectancy (WLE) in months. WLE: 64 - 45 = 19: 19 * 12 = 228 (WLE) Next we need to calculate Tom's monthly return on investment. 9%/12 = 0.75% Given the above information, we can calculate the following: FV = 2,413,544 n = 228 i = 0.75% PV = -250,000 (Retirement savings already accumulated) PMT = -1,736 (This is what Tom will need to save at the end of each month to reach his goal).
What is Tracy and Brett's current ratio? Tracy and Brett are both married Their current assets are $8,243 Their current liabilities are $6,921 Their monthly nondiscretionary expenses are $4,693 Their annual combined income is $70,000 Their annual debt payments (excluding monthly housing costs) is $22,084 A. 1.1910 B. 1.3355 C. 1.480 D. 5.0387
1.1910 Current ratio=cash + cash equivalents / current liabilities 8243 / 6,921=1.1910
Tracy and Brett are married .Their current assets $9,243 Their current liabilities $6,921 Their monthly nondiscretionary expenses $4,693 Their annual combined income $70,000 Their annual debt payments (excluding monthly housing costs) is $22,084 What is Tracy and Brett's current ratio? A. 0.7958 B. 1.3355 C. 1.9695 D. 5.0387
1.3355 Current ratio=cash +cash equivalents/current liabilities 9,243/6,921=1.3355
Tracy and Brett are married. Their current assets $9,243 Their current liabilities $6,921 Their monthly nondiscretionary expenses $4,693 Their annual combined income $70,000 Their annual debt payments (excluding monthly housing costs) 22,084 What is Tracy and Brett's emergency fund ratio in months? A. 1.2430 B. 1.3355 C. 1.9695 D. 3.1697
1.9695 Emergency Fund Ratio =current assets/monthly nondiscretionary expenses=9,243/4,693=1.9695
Jill has the following annual returns for an investment she made: Year 1: 12$ Year 2: 5% Year 3: 8% Year 4: 18% What is the geometric mean for this investment A. 8.25% B. 7.91% C. 10.64 D. 9.75%
10.64% GM=[(1.12)(1.05)(1.08)(1.18)]^1/4*100=10.64
Based on the CAPM, what return should Jordan expect from a security that last year returned 9% with a standard deviation of 12$, a beta of 1.1, when the overall market return has been 10.2%, and the risk free rate of return is 3% A. 10.92% B. 11.3% C. 11.6% D. 12.4%
10.92% ER=0.03+1.1(0.102-0.03) ER=0.03+0.0792 ER=0.1092=10.92%
Sydney has a portfolio with 50 shares of AAA with a current value of $20 per share, a return of 12%, and a beta of 1.30. She also has 25 shares of BBB with a return of 10%, a 0.80 beta, and currently priced at $60 per share. Finally she owns 75 shares of CCC priced at $50 per share, with a 1.1 beta and a 14% return. What is the weighted average portfolio return of Sydney's portfolio? A. 10.67% B. 11.33% C. 12.00% D. 12.72%
12.72% The weighted average return is calculated with a total portfolio value of $6,250 and each stock as a percent of that total, times its individual return, all added together to provide the weighted average portfolio return Stock Amount Return Weighting AAA 50 x $20 = $1,000 12% (1,000 ÷ 6,250) x 0.12 = 0.0192 BBB 25 x $60 = $1,500 10% (1,500 ÷ 6,250) x 0.10 = 0.0240 CCC 75 x $50 = $3,750 14% (3,750 ÷ 6,250) x 0.14 = 0.0840 Total $6,250 Return = 0.1272
Byron and Mandy are married and have a net worth of $20,000 and total assets of $150,000. If their revolving credit and unpaid bills total $8,000, how much are their total liabilities? A. 122,000 B. 130,000 C. 138,000 D. 150,000
130,000 Assets-Liabilities=Net worth 150,000-20,000=130,000
An analysis of the monthly returns for the past year of a mutual fund portfolio consisting of two funds revealed the following statistics: Fund A total return = 18% Fund A Standard deviation = 23% Fund A Percentage of portfolio = 35% Fund B total return = 11% Fund B Standard deviation = 16% Fund B Percentage of portfolio = 65% The Correlation Coefficient (r) between the two funds equals 0.25. What is the standard deviation of the portfolio? A. 13.16% B. 14.66% C. 18.45% D. 19.50%
14.66% Unsure about answer
Tony saved enough money to place $125,500 in an investment generating 9.25% compounded monthly. He wants to collect a monthly income of $1,350, at the beginning of each month, for as long as the money lasts. How many months will Tony have this income coming to him? A. 165 B. 145 C. 192 D. 162
162 Begin mode N=? i=9.25/12=0.7708 PMT= 1,350 FV=0
Susan's annual salary is $80,000. She contributes 10% of her salary to her 401(k) plan; and her employer contributes 5% of her salary to a profit sharing plan. She also contributes $2,500 per year to an IRA. What is Susan's approximate savings rate? A. 5% B. 10% C. 15% D. 18%
18% Not sure how he got this
Holly's salary is $120,000 per year. She contributes 12% of her salary to her 401(k) plan. Her employer matches with 5% of her salary to a 401(k) plan. She also contributes $2,500 per year to an IRA. Holly's annual savings rate is? A. 12.00% B. 14.08% C. 17.00% D. 19.08%
19.08% (14,400+6,000+2,500)/120,000=19.08
John and Mary, both 44 years old, are married and have one child, age 10. They plan to pay for hiscollege at an in-state university from age 18 to 23 and they would like to retire at age 62. They have provided the following financial data. Joint employment income $200,000 John's 401(k) plan contributions $16,500 Mary's IRA contributions $3,000 John's 401(k) plan employer match $5,000 Annual gifts from John's parents $10,000 Total Investment Assets $380,000 Total Cash and Cash Equivalents $100,000 From the goals and data given, which of the following statements is/are correct? (Do not make assumptions that are not stated) 1. John and Mary's investment assets to gross pay ratio is adequate for their age. 2. John and Mary's savings rate is appropriate for their goals. A. 1 only B. 2 only C. Both 1 and 2 D. Neither 1 nor 2
2 only The investment assets to gross pay ratio is 480,000/200,000=2.4 times which is not adequate for persons age 45. Their savings rate is 34,000/200,000=12.25% and appears adequate for both the retirement and education goals.
Joann wants to save for her daughter's education. Tuition costs $10,000 per year in today's dollars. Her daughter was born today and will go to school starting at age 18. She will go to school for 4 years. She can earn 11% on her investments and tuition inflation is 6%. How much must she save at the end of each year if she wants to make her last savings payment at the beginning of her daughter's first year of college? A. 1,889 B. 2,117 C. 2,370 D. 1,700
2,117 Step 1: FV at age 18 N=18 i=6 PV=10,000 FV=? -28,543.39 Step 2: PV start of school N=4 i=4.72 PV=? 106,688.19 PMT=-28,543.39 Step 3: Annual Savings N=18 i=11 FV=106,688.19 PMT? -2,117.00
Rod is 40 years old and plans on retiring at age 62 and living until age 90. Assume that he currently earns $110,000 and his wage replacement ratio is 72 percent. Social Security will provide $20,000 (in today's dollars) in retirement benefits per year. Inflation is expected to be 3 percent and Rod can earn 6 percent return on his investments. Find the amount Rod will need to have saved by day one of retirement. A. 1,993,230 B. 2,455,219 C. 2,004,516 D. 2,214,056
2,214,056 We start by calculating income needed per year (during retirement) in today's dollars. 110,000(0.72) - 20,000 = 59,200 Next we need to inflate this out to future dollars. PV = -59,200 N=62-40=22 i=3% solve for FV = 113,433.32 The next step determines the balance he needs in his investment accounts at retirement. PMT = 113,433.32 N = 90 - 62 = 28 i = {[(1.06)/(1.03)]-1}*100 = 2.9126 Solve for PV = -2,214,056
Judy recently purchased her first home for $200,000. She made a down payment of $20,000, and financed the balance over 15 years, at 4.25% interest. If Judy's first payment is due on October 1 of this year, approximately how much interest will she pay in this year? A. 1,262.90 B. 2,989.67 C. 3,288.63 D. 5,885.09
2,989.67 N=15*12 i=4.25/12 PV=180,000 FV=0 Solve for PMT put calculator in beginning mode Enter the AMORT register P1=1 P2=3 Arrow down to INT
Jason purchased a mutual fund at NAV of $40.00 and it was redeemed 8 months later at $44.00. During the time he owned the fund, he received a capital gains distribution of $4.00/share. What is his holding period return? A. 18% B. 17.5% C. 20% D. 22.5%
20% HPR=(44.00-40.00+4.00)/40.00=20$
4Your client invested $10,000 in an interest bearing promissory note earning an 11% annual rate of interest, compounded monthly. How much will the note be worth at the end of 7 years, assuming that all interest is reinvested at the 11% rate? A. 13,788.43 B. 20,762.60 C. 21,048.52 D. 21,522.04
21,522.04 N=7*12 i=11/12 PV=10,000 PMT=0 Solve for FV=-21,522.03612
Colin is trying to decide whether he should make his IRA contribution at the beginning of the year or at the end of the year. He wants to save $5,000 per year for 25 years in his IRA that can earn 7% per year. What would be the difference in his account value if he made the payments at the beginning of each year rather than at the end? A. 338,382 B. 22,137 C. 28,041 D. 316,245
22,137 is correct
Mike Smith has the following financial data. Investment Assets at Year End $475,000 Investment Assets at Beginning of the Year $392,000 Savings Made During the Year by Mike $27,000 Employer Match to Mike's 401(k) Plan $5,000 Total Assets on Ending Statement of Financial Position $700,000 Gross Income on Income Statement $100,000 Total Assets on Beginning Statement of Financial Position $600,000 Total Liabilities at Beginning of the Year $200,000 Total Liabilities at Year End $180,000 What was Mike's Return on Net Worth for the year? A. 12.17 B. 22.00 C. 24.50 D. 30.00
22.00 Unsure how to do this one
Seven years ago, Stan purchased 10 shares of an aggressive growth mutual fund at $90 per share, for a total of $900. Today he sold all 10 shares for $4,500. What was his average annual rate of return on this investment, before tax? A. 17.46% B. 19.58% C. 21.73% D. 25.85%
25.85% N=7 PV=-900 PMT=0 FV=4,500 Solve for i
Which of the following best completes this sentence: There has been a movement in recent times for the financial industry to be more in touch with _____________ due to their effect and persuasiveness in financial matters. 1. Capital Asset pricing. 2. Beta. 3. Psychology and sociology. A. 3 only B. 1 and 2 C. 1 and 3 D. None of the above E. All of the above
3 only
Seth was born today. Harold and Maude Clark anticipate that Seth will begin college at age 18. College education expenses are $15,000 per year in today's dollars and are expected to increase at an annual rate of six percent. The Clarks can earn an after-tax annual return of 10 percent. How much should the Clarks deposit at the end of each year to pay for Seth's education. The last deposit will be made when Seth reaches his 18th birthday and he will attend college for four years. A. 4,722.99 B. 5,926.40 C. 3,400.55 D. 3,555.84
3,555.84 Step 1: FV at age 18 N=18 i=6 PV=15,000 FV=? -42,815.09 Step 2: PV start of school N=4 i=3.77 PV=? 162,143.28 PMT=-42,815.09 Step 3: Annual savings N=18 i=10 FV=162,143.28 PMT=? -3,555.84
Bob and his wife Sally recently opened an investment account with the intention of saving enough to purchase the house of their dreams. Their goal is to have $45,000 down in 5 years. Their account will guarantee them a return of 8% compounded annually. How much do they need to put into the account right now to reach their objective? A. 46,778.96 B. 39,546.09 C. 51,214.75 D. 30,626.24
30,626.24 N=5 i=8 PV=30,626.24 PMT=0 FV=45,000
Your client, Brooke, decides to start saving for her son's college tuition. Her son was born today and will go to college for four years. Brooke wants to save until her son's first year of college. Given the following information, what is the present value of the total amount that Brooke needs to have saved at the beginning of her son's first year of college? Current tuition: $15,000 Tuition inflation: 6.5% Brooke's investment return: 10% A. 29,202 B. 39,010 C. 34,090 D. 31,959
31,959 Step 1: FV at age 19 N=18 i=6.50 PV=$15,000 FV=? -45,599.82 Step 2: PV start of school N=4 i=3.29 PV=? 177,690.14 PMT=-46,599.82 Step 3: Annual savings N=18 i=10 PV=? 31,959.13 FV=177,690.14
William owns 1 share of Park stock. He purchased the stock three years ago for $17.50. The stock is currently trading for $40 per share. The stock has paid the following dividends over the past three years. Year 1: $1.00 Year 2:$2.00 Year 3:$3.00 What is the compounded rate of return (IRR) that William has earned on this investment? A. 9.1% B. 19.1% C. 29.1% D. 39.73%
39.73%
Jan wants to plan for her daughter's education. her daughter, Rachel was born today and will go to college at age 18 for five years. Tuition is currently $15,500 per year, in today's dollars. Jan anticipates tuition inflation of 6% and believes she can earn an 11% return on her investment. How much must Jan save at the end of each year, if she wants to make her last payment at the beginning of her daughter's first year of college? A. 4,011.43 B. 7,334.72 C. 3,882.03 D. 2,547.54
4,011.43 Step 1: FV at age 18 N=18 i=6 PV=15,500 FV=? -44,242.26 Step 2: PV start of school N=5 i=4.72 PV=? 202,160.00 PMT=-44,242.26 Step 3: Annual savings N=18 i=11 FV=202,160.00 PMT=? 4,011.43
Elin wants to retire in 20 years when she turns 60. Elin wants to have enough money to replace 120% of her current income less what she expects to receive from Social Security. She expects to receive $20,000 per year from Social Security in today's dollars. Elin is conservative and wants to assume a 5% annual investment rate of return and assumes that inflation will be at 3% per year. Based on her family history, Elin expects that she will live to be 95 years old. If Elin currently earns $100,000 per year and expects her raises to equal the inflation rate, approximately how much does she need at retirement to fulfill her retirement goals? A. 3,489,514.23 B. 3,930,814 C. 4,045,303 D. 4,645,027.10
4,645,027.10 Step 1: PV=100,000(1.20*100,000)-20,000 N=20 i=3 PMT=0 FV=180,611.12 Step 2: FV=0 N=35 I=1.94% [(1.05/1.03)-1]*100 PMTAD=180,611.12 PV=4,645,027.10
Rob has just received a check for $32,595. This is a return from an investment that he made 18 years ago. He was told that the return was the equivalent of 11% per year. How much was his original investment? A. 3,566.90 B. 4,981.24 C. 5,760.98 D. 2,954.70
4,981.24 N=18 i=11 PV=4,981.24 PMT=0 FV=32,595
Jesse is a sophomore at Texas A&M university where his tuition is $22,500. Rachel, his older sister, is a senior at Baylor University, where tuition is $59,370. What is the maximum tax credit Jesse and Rachel's parents can take? A. 4,000 B. 4,500 C. 5,000 D. 5,500
5,000 Jesse is in his first four years of college so he is eligible for the AOTC (2,500, calculated as(2,000 * 100%)). Rachel is also eligible for the AOTC (2,500, calculated as (2,000 * 100%) + (2,000 * 25%)). Total 5,000
Calculate the IRR of a machine that is purchased for $5,000, sold at the end of year 4 for $2,500, and produces the following cash flows: Year 1: $700. Year 2: $800. Year 3: $900. Year 4:$1,000. A. 5.3% B. 6.0% C. 6.5% D. 7.3%
5.3% 5000 CF0 700 C01 800 C02 900 C03 1,000+2,500 C04 IRR=5.3258%
David won the lottery. He can take a single lump sum payout of $10 million dollars or receive $750,000 per year for the next 25 years. What rate of return would David need to break even if he took the lump sum amount instead of the annuity? A. 6.19% B. 5.31% C. 4.98% D. 5.56%
5.56% N= 25 i=? PV= 10,000,000 PMT=750,000 FV=0
Lori, a self-employed pediatrician, currently earns $210,000 annually. Lori has been able to save 15% of her annual Schedule C net income. Assume that Lori paid $19,000 in social security taxes, and that she plans to pay off her mortgage at retirement, thereby relieving her of her only debt. Lori presently pays $4,333.33 per month toward the mortgage. Based on the information provided herein, what do you expect Lori's wage replacement ratio to be a retirement? A. 41.0% B. 49.5% C. 51.2% D. 67.0%
51.2% Salary 210,000 (100%) Social Security 19,000 (9.05%) Savings 31,500 (15%) Mortgage 52,000 (26%) 107,500 (51.19%)
Samantha has the following transactions: She purchases $5,000 worth of a mutual fund with cash from her savings account. She spends $6,000 on a vacation with cash from her money market account She spends $10,000 on new furniture, and uses her credit card to make the purchase. What is the combined impact of these transactions on her net worth? A. 21,000 decrease B. 6,000 decrease C. 15,000 increase D. 6,000 increase
6,000 decrease
Tracy purchased a car for $19,500. She is financing the purchase at an 11% annual interest rate, compounded monthly for 3 years. What is the payment that Tracy is required to make at the end of each month? A. 606.71 B. 632.61 C. 638.40 D. 684.97
638.40 N= 3 X 12 i=11/12 PV=19,500 FV=0 Solve for PMT
Which of the following is the most common range for wage replacement ratios? A. 50% to 60%. B. 60% to 70%. C. 70% to 80%. D. 80% to 90%.
70% to 80%.
Your client, Jim, is currently 45 years old and earns $90,000 a year, pays 7.65% of his gross pay in Social Security payroll taxes, and saves 14% of his gross income. Jim wants to maintain his current lifestyle during retirement, and any work-related savings from retirement are expected to be completely offset by additional spending adjustments during retirement. Using the top down approach, find Jim's Wage Replacement Ratio as a percentage. A. 82.35% B. 79.35% C. 78.35% D. 77.35%
78.35% The correct answer is 78.35%, calculated as follows: $90,000 = 100.00% of salary in % terms ($12,600) = (14.00%) less: current savings in % terms (3,825) = (7.65%) less: payroll taxes in % terms = $41,175 = 78.35% wage replacement ratio in % terms
Margaret, a 35-year-old client who earns $45,000 a year, pays 7.65% of her gross pay in Social Security payroll taxes, and saves 12% of her annual gross income. Assume that Margaret wants to maintain her exact pre-retirement lifestyle. Calculate Margaret's wage replacement ratio using the top-down approach (round to the nearest %) and using pre-tax dollars. A. 71% B. 93% C. 84% D. 80%
80% 100%-12%-7.65%=80.35
Hannah has decided to save for a vacation in 18 months. She will save the money into a short-term investment account returning 4% annually. How much will she have to put away at the beginning of each month if the vacation cost is $15,000? (Round to the nearest dollar.) A. 815 B. 810 C. 807 D. 800
807 Beginning mode N=18 i=4/12=0.3333 PV=0 PMT=? FV=15,000 PMTAD=807.28
Cindy invests $20,000 in a limited partnership today. At the end of each years 1 through 5, she will receive the after-tax cash flows shown below. The partnership will be liquidated at the end of the fifth year. Cindy is in the 35% federal income bracket. Years Cash Flows 0 - $20,000 1 $0 2 $4,000 3 $6,000 4 $8,000 5 $10,000 The after tax IRR on this investment is A. 6.01 B. 7.26 C. 8.15 D. 9.24
9.24 CF0=-20,000 CF1=0 CF2=4,000 CF3=6,000 CF4=8,000 CF5=10,000 IRR=9.24
Brandon buys a piece of equipment for $15,000. He pays $5,000 for upgrades in year 1 and the equipment generates $2,000 in cash flow for year 1. In year 2 the equipment generates $8,000, year 3 it generates $4,000, but Brandon sells it for $6,000 but also pays a $500 commission. Assume a required rate of return of 8%. What is the NPV? A. <3,378> B. 3,378 C. <2,178 D. 2,178
<3,378> CF0= CF1=2,000 CF2=8,000 CF3=4,000+6,000-500=9,500 i=8 NPV?
What is one of the primary differences between a Coverdell Education Savings Account and 529 Savings Plan? A. A Coverdell can be used for private elementary, middle or high school. B. A Coverdell does not have a phase-out limit for participation. C. A 529 plan has a phase-out limit for participation. D. A Coverdell allows a 5-year proration of contributions.
A Coverdell can be used for private elementary, middle or high school. A Coverdell may be used for private elementary, middle or high school. A Coverdell does have phase-out limits, whereas a 529 Savings Plan does not. A 529 Savings Plan permits a 5-year proration of contributions, not a Coverdell.
Janice is a nurse in the critical care department. She has property insurance, but does not have disability insurance through the hospital. She does not know that much about disability, except that a friend of hers told her that she needed to acquire it. Which of the following statements is correct? A. Any occupation is the better choice for coverage than own occupation. B. The elimination period is the period after the policy stops paying benefits. C. A guaranteed renewable feature of a policy obligates the insurer to continue coverage as long as premiums are paid on the policy. D. All of the above
A guaranteed renewable feature of a policy obligates the insurer to continue coverage as long as premiums are paid on the policy.
Which of the following is an element that must exist before a risk is considered insurable? A. Insured losses can only be intentional if the insured was not a part of the party inflicting the harm B. The loss must not pose a catastrophic risk for the insured C. A large number of similar exposure units must exist to help develop statistics for forecasting losses D. All of the above
A large number of similar exposure units must exist to help develop statistics for forecasting losses
Steven has an investment with the following annual returns for four years: Year 1: 10% Year 2: -3% Year 3: 5% Year 4: 11% What is the Arithmetic Mean (AM) and what is the geometric Mean (GM)? A. AM=5.75%, GM=7.91% B. AM=5.75%, GM=5.60% C. AM=7.67%, GM=7.91% D. AM=7.67%, GM=5.60%
AM=5.75%, GM=5.60% AM=(10%+-3%+5%+11%)/4=5.75% GM=[(1.10)(0.97)(1.05)(1.11)^(1/4)-1*100=5.60%
Proper and practical communication skills and techniques in financial counseling can aid the financial planning advisor to understand: A. Their clients B. What their clients' perceptions of their own needs are C. What their clients' objectives are D. All of the above
All of the Above
Which of the following are heuristics or cognitive biases about which an advisor should be knowledgeable? A. The Affect Heuristic B. Overreaction bias C. Overconfidence bias D. Ancohring E. All of the Above
All of the above Heuristics or cognitive biases about which an advisor should be knowledgeable
Which of the following reveals the relationship of a given security's movement relative to that of the market? A. Beta B. Treynor C. Covariance D. Standard deviation
Beta Treynor is a risk adjusted performance measure. Covariance measures two stocks movements relative to one another. Standard deviation measures a security's volatility.
Which of the following is / are correct? 1. The IRR is the discount rate which equates the present value of an investment's expected costs to the present value of the expected cash inflows 2. If the cost of capital for an investment is 9% and the IRR is 9.24, the investment should be accepted. A. I only B. 2 only C. Both 1 and 2 D. Neither 1 nor 2
Both 1 and 2 Both statements are true. When IRR is higher than cost of capital, the project would be acceptable
Which of the following options best completes this sentence: "In the event that a client is trying to communicate a message that is not clear, then the advisor will want to ..." A. Take a break B. Reschedule the meeting for another day C. Move on D. Clarify what the client is trying to communicate with a clarifying statement
Clarify what the client is trying to communicate with a clarifying statement
are issued by firms to raise capital to fund ongoing operations, retire debt, fund capital projects or acquisitions. A. Corporate Bonds B. Revenue Bonds C. Zero Coupon Bonds D. Municipal Bonds
Corporate Bonds
Jennifer Jones wants to accumulate wealth, but she has told you, her new financial planner, that she is risk averse. What should you do with her money? A. Invest in products that bring the highest return regardless of risk. B. Invest in products that produce high income because fixed income products are generally low risk. C. Put Jennifer's assets in 100% cash equivalents because she is risk averse. D. Determine Jennifer's true risk tolerance.
Determine Jennifer's true risk tolerance.
An example of a moral hazard is not locking the doors of your home when you are out of town for two weeks because you have insurance, while an example of morale hazard is burning down your house to collect insurance. A. True B. False
False
The blackout period refers to the period of time immediately following the death of the breadwinner. A. True B. False
False
The student loan interest deduction is not an above the line deduction. A. True B. False
False
David wants to know which of the following mutual funds provided him with the best risk adjusted return. Using the Sharpe ratio, which fund provided the highest return, per unit of risk, if the risk free rate of return was 4% and the S&P 500 returned 10%. Total Return: (Fund A = 12%) (Fund B = 17%) Beta: (Fund A = .85) (Fund B = 1.1) Stand Deviation: (Fund A = 5%) (Fund B = 7%) R-Squared: (Fund A = .50) (Fund B = .63) A. Fund A: 1.65 Fund B: 1.50 Fund A has the highest Sharpe Ratio, therefore it provided the higher return, per unit of risk. B. Fund A: 1.60 Fund B: 1.86 Fund B has the highest Sharpe ratio, therefore it provided the higher return, per unit of risk. C. Fund A: 1.65 Fund B: 1.50 Fund A has the highest sharp ratio, therefore fund B provided the higher return, per unit of risk. D. Fund A: 1.60 Fund B: 1.86 Fund B is the highest Sharpe ratio, therefore fund A provided the higher return, per unit of risk.
Fund A: 1.60 Fund B: 1.86 Fund B has the highest Sharpe ratio, therefore it provided the higher return, per unit of risk. The correct answer is B. Fund A1.60 = (.12 - .04)/.05 Fund B1.86 = (.17 - .04)/.07 Fund B has the highest Sharpe ratio, therefore it provided the higher return, per unit of risk.
Conditions that increase either the frequency or severity of loss are called: A. Circumstances B. Risks C. Hazards D. Perils
Hazards
What type of investment fund takes the approach of "If you can't beat 'em, join 'em?" A. Money Market Mutual Funds B. International Funds C. Sector Funds D. Index Funds
Index Funds
B.J. leaves his garage door open during the day because he knows he has property insurance and he is lazy. One day someone steals his new truck from his garage. Leaving the garage door open is an example of: A. Physical Hazard B. Moral Hazard C. Morale Hazard D. A peril theft
Morale hazard
Which of the following statements is correct regarding Social Security? A. Retirement benefits under Social Security are intended to provide at least a 50% wage replacement ratio for everyone except for the very highest earners. B. Non-working spouses of retirees receiving Social Security benefits are entitled to a 50% benefit regardless of the non-working spouse's age. C. More than 20 percent of retirees rely on Social Security for more than 90% of their retirement income. D. All employees in the United States are covered by Social Security and are required to contribute FICA taxes.
More than 20 percent of retirees rely on Social Security for more than 90% of their retirement income.
Walter has come to you asking about investments that will produce steady income, provide relative safety of principal, and give him a tax advantage. What will you recommend that he consider adding to his portfolio? A. Municipal Bonds B. Zero-coupon U.S. Treasure bonds C. Growth and income mutual fund D. A corporate bonds
Municipal bonds Municipal bonds will provide steady income and they are tax advantaged. Treasury zeroes pay tax on accrued but unrealized income (phantom income.) Growth and income mutual funds do not provide tax advantages, unless held in a tax deferred account. A corporate bond will generate tax income each year coupon payments are received.
Which of the following statements, if any, is (are) correct? 1. Prepaid Tuition plans provide for the prepayment of college tuition at current tuition prices for future enrollment. 2. A disadvantage of a QTP (qualified tuition plan) is that the owner / contributor must relinquish control of the account, and share control of the funds with the student / beneficiary. A. 1 only B. 2 only C. Both and 1 2 D. Neither 1 nor 2
Neither 1 nor 2 In a QTP, the owner / contributor alone controls the account
All of the following statements concerning educational funding are correct EXCEPT: A. QTPs allow individuals to participate in prepaid tuition plans whereby tuition credits are purchased for a designated beneficiary for payment or waiver of higher education expenses, or participate in savings plans whereby contributions of money are made to an account to eventually pay for higher education expenses of a designated beneficiary. B. Prepaid Tuition Plans are plans where prepayment of college tuition is allowed at current prices plus a small premium for enrollment in the future. C. A Savings Plan is a type of QTP where the owner of the account contributes cash to the account so that the contributions can grow tax deferred. D. One of the disadvantages of QTPs is that the owner/contributor shares control of the account with the student/beneficiary.
One of the disadvantages of QTPs is that the owner/contributor shares control of the account with the student/beneficiary.
Holly is considering purchasing a new car for $30,000. The dealer is offering two mutually exclusive options on the purchase: Option 1: Receive a $4,000 rebate on the price of the car and finance the balance over 5 years at 4% interest, or Option 2: Finance the vehicle for 7 years at 0% interest with no rebate. Which of the following options should Holly select if her goal is to minimize the total amount she pays for the car? A. Option 1 is better B. Option 2 is better C. both options cost the same D. There is not enough information to answer the question
Options 1 is better N = 5 x 12 i = 4 ÷12 = 0.333 PV = 30,000 - 4,000 = 26,000 PMT = ? FV = 0 478.83 x 60 = 28,729.77 Total paid = $28,729.77 Option 2:Cost is $30,000 Total paid = $30,000
Lenny works at a hotel in accounting. He is planning on purchasing a home and has met with an insurance agent. However, he is really not clear about all the policies that they discussed. Which of the following statements is correct? A. It is better to purchase a named peril homeowners policy. B. PLUPs are generally inexpensive relative to the coverage they provide. C. The rates on auto insurance are relatively uniform among the states. D. It is important to get a homeowners policy that provides for contents protection equal to actual cash value.
PLUPs are generally inexpensive relative to the coverage they provide.
Tom and Betty have AGI of $150,000 and have not planned for their children's education. Their children are ages 18 and 17 and the parents anticipate paying $20,000 per year, per child for education expenses. Which of the following is the most appropriate recommendation to pay for the children's education? A. 529 Savings Plan B. PLUS Loan C. Pell Grant D. Coverdell ESA
PLUS Loan It's too late for the parents to begin saving for their children's education so that eliminates the 529 Savings Plan and Coverdell ESA. Their AGI is too high for a Pell Grant.
Mrs. Escovido has come to you for advice on financing her son's college education at a state university. Even though her income exceeds $200,000, she has not saved enough for his college expenses. You advise her that her best opportunity to acquire education funds would be through: A. Pell grants B. Subsidized Stafford Student Loans C. Supplemental education opportunity grants D. Parents loans for undergraduate students (PLUS)
Parents loans for undergraduate students (PLUS) Under PLUS, parents may borrow an unlimited amount (not to exceed cost of schooling) of funds for their children's undergraduate schooling. This loan is not need based, unlike the other three choices.
With the possibility of losses exceding general homeowners policies and automobile policies, what type of policy could someone purchase for extremely larg financial risks? A. Large asset risk policy B. Extreme loss umbrella policy C. property risk umbrella policy D. Personal liability umbrella policy
Personal liability umbrella policy
Loss severity is the: A. Probability that a liability judgment may exceed an individual's net worth B. Probable size of a loss that may occur C. Probable number of losses that may occur. D. Probability that a particular property could be totally lost
Probable size of a loss that may occur
Loss severity is the: A. Probability that a liability judgment may exceed an individual's net worth. B. Probable size of a loss that may occur. C. Probable number of losses that may occur. D. Probability that a particular property could be totally lost.
Probable size of a loss that may occur
What impact would inflation have on retirement? A. Increases capital needs B. Fewer alternatives in retirement C. Unable to meet capital requirements D. Reduces purchasing power
Reduces purchasing power The correct answer is that inflation reduces purchasing power.
Which of the following is not a response to a perceived risk? A. Risk avoidance B. Risk reduction C. Risk retention D. Risk transmission E. Risk transfer
Risk transmission
Saben is 40 and wants to retire in 20 years. His family has a history of living well into their 90s. Therefore, he would like to plan on living until age 100, just in case. He currently needs $100,000 and expects that he will need about 80% of that if he were retired. He can earn 9 percent in his portfolio and expects inflation to be 3 percent annually. Some years ago, he purchased an annuity that is expected to pay him $30,000 per year beginning at age 60. It includes an inflation rate cost of living adjustment. In addition, he received $500,000 from his uncle BJ when he died. Saben has spent $200,000 on his home, but is investing $300,000 for his retirement. His Social Security benefit in today's dollars is $20,000. Which of the following statements is true? A. Saben needs to accumulate approximately $1,205,578 by age 60 to fund his retirement. B. Saben's current savings and other sources of income are adequate to satisfy his retirement needs. C. Saben needs to save approximately $9,300 per year for the next 20 years to fund his retirement. D. Saben needs to save approximately $7,926 per year at year end for the next 20 years to fund his retirement.
Saben's current savings and other sources of income are adequate to satisfy his retirement needs. Step 1: Determine amount to be funded Income today $100,000.00 WRR 80% Needs $80,000.00 Less Social Security $(20,000.00) Amount to be funded $60,000.00 Step 2: Inflate funds to retirement age PV $(60,000.00) N =20 i=3.00% PMT=0 FV=108,366.67 Step 3: PV of retirement annuity PMT $78,366.67 N=40 I=5.8252 FV=0 PV=1,275,806.35 Step 4: Annual funding amount FV $1,275,806.35 N=20 i=9.00% PV=(300,000.00) PMT=7,926.43
Which of the following types of investment risk cannot be eliminated through diversification? A. Unsystematic risk B. Company specific risk C. Systematic risk D. Business risk
Systematic risk Systemic risk is the only type of listed risk that cannot be eliminated through diversification.
Which one of the following statements is wrong? A. A Pell Grant is a federally funded grant awarded to undergraduate students who have not earned a Bachelors or graduate degree. B. The EFC calculation, which is based on a student's ACT score, is used to determine eligibility and / or award amount for a Pell Grant. C. One type of Stafford loan is the direct Stafford loan that is provided directly to the student 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 who participates in the FFEL program.
The EFC calculation, which is based on a student's ACT score, is used to determine eligibility and / or award amount for a Pell Grant.
All of the following statements concerning educational funding are correct EXCEPT: A. The American Opportunity Tax Credit is available for qualified tuition and enrollment fees incurred in the first four years of post-secondary education for the taxpayer, spouse, or dependent. B. The Lifetime Learning Credit is a tax credit available to pay for tuition and enrollment fees for undergraduate, graduate or professional degree programs. C. If used to pay for qualified higher education expenses at an eligible institution or state tuition plan, Series EE United States Savings Bonds bestow significant tax savings. D. The Uniform Gift to Minor's Act (UMGA) allows parents the option to put assets in a custodial account for a child once the child exceeds the age of 14.
The Uniform Gift to Minor's Act (UMGA) allows parents the option to put assets in a custodial account for a child once the child exceeds the age of 14.
Which of the following is/are incorrect regarding the Humanistic Paradigm? A. The advisor needs a philosophical stance that humankind is basically bad and that people do not have the inherent capability of self-direction and growth under the right set of circumstances. B. A Humanistic counselor would define mental health as having congruent and aligned thoughts, feelings and behavior. C. Goals in treatment are centered on establishing congruence and acceptance of personal responsibility. D. The majority of the Humanistic theories view clients as experts on themselves. E. None of the above
The advisor needs a philosophical stance that humankind is basically bad and that people do not have the inherent capability of self-direction and growth under the right set of circumstances.
All of the following statements regarding NPV are true EXCEPT: A. A positive NPV indicates the present value of the cash flows exceeds the initial investment B. A negative NPV indicates the present value of the cash flows is less than the initial investment C. An NPV equal to zero indicates the present value of the cash flows is equal to the initial investment D. The internal rate of return is the discount rate that causes the initial investment to exceed the present value of the cash flows
The internal rate of return is the discount rate that causes the initial investment to exceed the present value of the cash flows
All of the following statements concerning educational fund 529 Savings Plans are correct EXCEPT: A. Contributions are recognized on a five year pro rata basis. B. Earnings grow on a tax deferred basis, unless used for qualified education expenses, and then distributions are tax free. C. The primary benefit of a 529 Savings plan is the state income tax deduction for contributions. D. Earnings are included in gross income and a 10% penalty is assessed if distributions are not used for qualified education expenses.
The primary benefit of a 529 Savings plan is the state income tax deduction for contributions. Difficult question, but the primary benefit is tax deferred growth. Not all states have a state income tax deduction and in many states the phaseout is fairly low.
Which of the following statements regarding retirement trends is correct? A. The savings rate in the United States has consistently been decreasing over the last 30 years. B. The spending pattern of most elderly retirees shows an average decline in outflow during the atter part of retirement. C. Analysis of Social Security shows that only a small percentage of retirees in the United States rely on Social Security benefits as a major part of their retirement sources of income. D. Historically, the retirement age for citizens of the United States has been increasing as workers life expectancy has been increasing. However, that trend has been reversing over the last several years.
The spending pattern of most elderly retirees shows an average decline in outflow during the atter part of retirement.
Which of the following is not a way to calculate the amount of life insurance needed? A. Term life insurance method B. The capitalization of earnings method C. The financial needs method D. The human life value method
The term life insurance method Term life insurance is a type of life insurance, not a way to calculate the amount needed.
Which of the following is incorrect with respect to heuristics in the realm of financial advice? A. In the financial advisor-client relationship, one challenge lies in delivering good advice that is accepted by the client B. Recommendations must pass through the wealth of emotions, biases and heuristics that the client possesses. C. There is no benefit to the advisor to have a general understanding of the cognitive biases that are prevalent in the realm of financial decision making D. All of the above
There is no benefit to the advisor to have a general understanding of the cognitive biases that are prevalent in the realm of financial decision making
The balance sheet equation is: A. Total Assets / Total Liabiltiies= Net Worth B. Total Assets x Total Liabilities= Net Worth C. Total Assets - Total Liabilities= Net Worth D. Total Assets + Total Liabilities= Net Worth
Total Assets - Total Liabilities = Net Worth
Which of the following best describes Behavioral Finance? A. Behavioral Finance concepts are more developed than Traditional Finance B. Behavioral Finance streamlined financial data C. Traditional Finance's introduction of scientific method into financial analysis has some benefit to Behavioral Finance D. Behavioral Finance is very similar to Traditional Finance in its asset pricing models and portfolio theories
Traditional Finance's introduction of scientific method into financial analysis has some benefit to Behavioral Finance
A rational investor would be considered to be indifferent or uncaring if a profit is realized by a dividend declared by a company versus if the same profit is realized by selling the stock at a gain. A. True B. False
True
Behavioral investors have been characterized as those who tend to choose portfolios by evaluation and decisions based on expected wealth, desire for security, aspiration levels, and probabilities of aspiration levels. A. True B. False
True
Beth saves $2,500 a year from age 25 until age 34 (inclusive) and invests the money in an account earning 5% annually. Beth stops investing at age 34, but does not withdraw the accumulation until age 65. In contrast, Bill saves $2,500 a year from age 35 until age 65 inclusively and invests in a similar account to Beth, earning 5% annually. Beth will have accumulated significantly more than bill at age 65. A. True B. False
True
