Finance ch. 1-14 Study Guide

Joshua borrowed $900 for one year and paid $45 in interest. The bank charged him a service charge of $12. What is the finance charge on this loan?

Finance charge = Interest + Service charge = $45 + $12 = $57

Would you prefer a fully taxable investment earning 12.3 percent or a tax-exempt investment earning 9.7 percent? (Assume a 24 percent tax rate.)

Fully taxable investment:After-tax earnings = Pretax earnings × (1 − Tax rate) = 0.123 × (1 − 0.24) = 0.09348, or 9.348% Tax-exempt investment: After-tax earnings = Pretax earnings = 9.70% You should prefer the investment with the higher after-tax earnings.

Kara George received a $20,000 gift for graduation from her uncle. If she deposits this in an account paying 5 percent, what will be the value of this gift in 11 years? Use Exhibit 1-A.

Future value = $20,000 × 1.710 = $34,200

Assume Samantha Jones had the following itemized deductions: Donations to church and other charities$ 3,750 Medical and dental expenses exceeding 10 percent of adjusted gross income$ 2,230 Mortgage interest$ 3,950 State income tax$ 1,600 Should she use the itemized deduction or the standard deduction? The standard deduction for her tax situation is $12,400.

Itemized deductions = Donations + Medical expenses in excess of 10% of AGI + Mortgage interest + State income tax = $3,750 + $2,230 + $3,950 + $1,600 = $11,530 The standard deduction of $12,400 is more than itemizing deductions which totaled $11,530, so she should use the standard deduction

Janie has a joint account with her mother with a balance of $745,000. Based on $250,000 of Federal Deposit Insurance Corporation coverage, what amount of Janie's savings would not be covered by deposit insurance?

Janie's portion of joint account = 0.50 × $745,000 = $372,500 Uninsured portion of Janie's account = Janie's portion of joint account − FDIC coverage amount = $372,500 − $250,000 = $122,500

Janie has a joint account with her mother with a balance of $753,000. Based on $250,000 of Federal Deposit Insurance Corporation coverage, what amount of Janie's savings would not be covered by deposit insurance?

Janie's portion of joint account = 0.50 × $753,000 = $376,500 Uninsured portion of Janie's account = Janie's portion of joint account − FDIC coverage amount = $376,500 − $250,000 = $126,500

If 440,000 people each receive an average refund of $2,200, based on an annual interest rate of 3 percent, what would be the lost annual income from savings on those refunds?

Lost annual income = Number of refunds × Average refund amount × Interest rate = 440,000 × $2,200 × 0.03 = $29,040,000

Ben and Carla Covington plan to buy a condominium. They will obtain a $230,000, 25-year mortgage at 6.5 percent. Their annual property taxes are expected to be $2,300. Property insurance is $580 a year, and the condo association fee is $270 a month. Based on these items, determine the total monthly housing payment for the Covingtons. Use Exhibit 7-7.

Monthly mortgage payment = Mortgage payment factor × (Mortgage amount/$1,000) = $6.75 × ($230,000/$1,000) = $1,552.50 Total monthly housing payment = Monthly mortgage payment + [(Property taxes + Insurance)/12] + Condo association fee = $1,552.50 + [($2,300 + $580)/12] + $270 = $2,062.50

Which mortgage would result in higher total payments? Mortgage A: $1,020 a month for 20 years. Mortgage B: $850 a month for 6 years and $1,098 a month for 14 years.

Mortgage A: Total payments = Monthly payment × 12 × Number of years = $1,020 × 12 × 20 = $244,800 Mortgage B: Total payments = (Monthly payment1 × 12 × Number of years1) + (Monthly payment2 × 12 × Number of years2) = ($850 × 12 × 6) + ($1,098 × 12 × 14) = $245,664

What would be the net present value of a microwave oven that costs $166 and will save you $75 a year in time and food away from home? Assume an average return on your savings of 5 percent for 6 years. (Hint: Calculate the present value of the annual savings, then subtract the cost of the microwave.) Use Exhibit 1-D.

Net present value = (Annual savings × Present value annuity factor) − Initial cost = ($75 × 5.076) − $166 = $214.70

What would be the net present value of a microwave oven that costs $167 and will save you $76 a year in time and food away from home? Assume an average return on your savings of 5 percent for 5 years. (Hint: Calculate the present value of the annual savings, then subtract the cost of the microwave.) Use Exhibit 1-D.

Net present value = (Annual savings × Present value annuity factor) − Initial cost = ($76 × 4.329) − $167 = $162.00

What is the annual opportunity cost of a checking account that requires a $200 minimum balance to avoid service charges? Assume an interest rate of 2 percent.

Opportunity cost = Required minimum balance × Interest rate = $200 × 0.02 = $4.00

What is the annual opportunity cost of a checking account that requires a $320 minimum balance to avoid service charges? Assume an interest rate of 4.5 percent.

Opportunity cost = Required minimum balance × Interest rate = $320 × 0.045 = $14.40

If an adjustable-rate 30-year mortgage for $116,500 starts at 7.0 percent and increases to 8.0 percent, what is the increase in the monthly payment amount? Use Exhibit 7-7.

Payment increase = (New mortgage factor − Old mortgage factor) × (Mortgage amount/$1,000) = ($7.34 − $6.65) × ($116,500/$1,000) = $80.39

A work-at-home opportunity is available in which you will receive 3 percent of the sales to customers you refer to the company. The cost of your "franchise fee" is $740. How much would your customers have to buy to cover the cost of this fee?

Purchase requirement = Franchise fee/Earnings rate = $740/0.03 = $24,667

A work-at-home opportunity is available in which you will receive 2 percent of the sales to customers you refer to the company. The cost of your "franchise fee" is $770. How much would your customers have to buy to cover the cost of this fee?

Purchase requirement = Franchise fee/Earnings rate = $770/0.02 = $38,500

ch 6) An online buying club offers a membership for $135, for which you will receive a discount of 10 percent on all brand-name items you purchase. How much would you have to buy to cover the cost of the membership?

Purchase requirement = Membership fee/Discount rate = $135/0.10 = $1,350

An online buying club offers a membership for $145, for which you will receive a discount of 10 percent on all brand-name items you purchase. How much would you have to buy to cover the cost of the membership?

Purchase requirement = Membership fee/Discount rate = $145/0.10 = $1,450

Brenda plans to reduce her spending by $35 a month. What would be the future value of this reduced spending over the next 12 years? (Assume an annual deposit to her savings account and an annual interest rate of 6 percent.) Use Exhibit 1-B.

Reduction in annual spending = Reduction in monthly spending × 12 = $35 × 12 = $420 Future value of spending reduction = Reduction in annual spending × Future value annuity factor = $420 × 16.870 = $7,085.40

If a person has ATM fees each month of $21 for five years, what would be the total cost of those banking fees?

Total Cost = Monthly fee × 12 × Number of years = $21 × 12 × 5 = $1,260

If a person has ATM fees each month of $25 for seven years, what would be the total cost of those banking fees?

Total Cost = Monthly fee × 12 × Number of years = $25 × 12 × 7 = $2,100

Condominiums usually require a monthly fee for various services. At $335 a month, how much would a homeowner pay over a period of 10 years for living in this housing facility?

Total fee = Monthly fee × 12 × Number of years = $335 × 12 × 10 = $40,200

ch 3) Daniel Simmons arrived at the following tax information: Gross salary$ 54,480 Interest earnings$ 210 Dividend income$ 150 Adjustments to income$ 1,090 Standard deduction$ 12,400 What amount would Daniel report as taxable income?

Total income = Gross salary + Dividend income + Interest earnings = $54,480 + $150 + $210 = $54,840 Adjusted gross income = Total income − Adjustments = $54,840 − $1,090 = $53,750 Taxable income = Adjusted gross income − Standard Deductions = $53,750 − $12,400 = $41,350

Reginald Sims deposits $9,000 each year in a tax-deferred retirement account. If he is in a 10 percent tax bracket, by what amount would his tax be reduced over a 15-year time period?

Total tax savings = (Annual retirement contribution × Tax rate) × Number of years = ($9,000 × 0.10) × 15 = $13,500

Allison has returned to school after five years out of the work force. She is taking one course at the local university for a cost of $1,320. To minimize her taxes, should she take a tuition and fees deduction or an education credit? (Assume a 15 percent tax rate.)

Tuition and fees deduction = $1,320 × 0.15 = $198 Education credit = $1,320 Thus, the education credit is the best option.

Carla Lopez deposits $3,100 a year into her retirement account. If these funds have average earnings of 7 percent over the 40 years until her retirement, what will be the value of her retirement account? Use Exhibit 1-B.

$3,100 × 199.640 = $618,884

Tran Lee plans to set aside $4,100 a year for the next five years, earning 5 percent. What would be the future value of this savings amount? Use Exhibit 1-B.

$4,100 × 5.526 = $22,656.60

What would be the yearly earnings for a person with $4,800 in savings at an annual interest rate of 4 percent?

$4,800 × 0.04 = $192

A family spends $61,000 a year for living expenses. If prices increase 5 percent a year for the next three years, what amount will the family need for their annual living expenses after three years? Only use the FV factors obtained in Exhibit 1-A to calculate this solution.

$61,000 × 1.158 = $70,638

If you desire to have $8,000 for a down payment for a house in six years, what amount would you need to deposit today? Assume that your money will earn 5 percent. Use Exhibit 1-C.

$8,000 × 0.746 = $5,968

Pete Morton is planning to go to graduate school in a program of study that will take three years. Pete wants to have $8,000 available each year for various school and living expenses. Use Exhibit 1-D. If he earns 5 percent on his money, how much must he deposit at the start of his studies to be able to withdraw $8,000 a year for three years?

$8,000 × 2.723 = $21,784

If you borrow $8,500 with a 8 percent interest rate to be repaid in seven equal payments at the end of the next seven years, what would be the amount of each payment? Use Exhibit 1-D.

$8,500/5.206 = $1,632.73

In 2019, selected automobiles had an average cost of $17,000. The average cost of those same automobiles is now $20,230. What was the rate of increase for these automobiles between the two time periods?

($20,230 − $17,000)/$17,000 = 0.19, or 19%

The Brandon household has a monthly income of $5,750 on which to base their budget. They plan to save 10 percent and spend 32 percent on fixed expenses and 56 percent on variable expenses. a. What amount do they plan to set aside for each major budget section? b. After setting aside these amounts, what amount would remain for additional savings or for paying off debts?

a. Savings = Savings percent × Monthly income = 0.10 × $5,750 = $575.00 Fixed expenses = Fixed expenses percent × Monthly income = 0.32 × $5,750 = $1,840.00 Variable expenses = Variable expenses percent × Monthly income = 0.56 × $5,750 = $3,220.00 b.Remaining amount = Monthly income − Savings − Fixed expenses − Variable expenses = $5,750 − $575.00 − $1,840.00 − $3,220.00 = $115.00

Based on the following data, determine the amount of total assets, total liabilities, and net worth. Liquid assets $4,720 Current liabilities$ 2,520 Long-term liabilities$ 84,730 Investment assets$ 9,190 Household assets$ 96,390

a. Total assets = Liquid assets + Investment assets + Household assets = $4,720 + $9,190 + $96,390 = $110,300 b .Total liabilities = Current liabilities + Long-term liabilities = $2,520 + $84,730 = $87,250 c.Net worth = Total assets − Total liabilities = $110,300 − $87,250 = $23,050

Using the following balance sheet items and amounts, calculate the total liquid assets and total current liabilities. Money market account$ 3,150 Medical bills$ 350 Mortgage$ 166,000 Checking account$ 890 Retirement account$ 91,800 Credit card balance$ 599

a. Total liquid assets = Money market account + Checking account = $3,150 + $890 = $4,040 b. Total current liabilities = Medical bills + Credit card balance = $350 + $599 = $949

Assume a person saves $66 a month by using coupons and doing comparison shopping. a. What is the amount of annual savings? b. What would be the future value of this annual amount over 10 years, assuming an interest rate of 4 percent? Use Exhibit 1-B.

a.Annual savings = Monthly savings × 12 = $66 × 12 = $792 b.Future value = Annual savings × Future value annuity factor = $792 × 12.006 = $9,508.75

Assume a person saves $88 a month by using coupons and doing comparison shopping. a. What is the amount of annual savings? b. What would be the future value of this annual amount over 7 years, assuming an interest rate of 5 percent? Use Exhibit 1-B.

a.Annual savings = Monthly savings × 12 = $88 × 12 = $1,056 b.Future value = Annual savings × Future value annuity factor = $1,056 × 8.142 = $8,597.95

Use the following data: Down payment (to finance vehicle)$ 4,200 Monthly loan payment$ 590 Length of loan - 48months Value of vehicle at end of loan$ 7,600 Down payment for lease$ 1,300 Monthly lease payment$ 460 Length of lease - 48months End-of-lease charges$ 650 a. What is the total cost for buying and for leasing a motor vehicle with a cash price of $25,200? b. Based on your answers in part a, would you recommend buying or leasing?

a.Buying: Total cost = Down payment + (Loan payment × Number of payments) − Ending vehicle value = $4,200 + ($590 × 48) − $7,600 = $24,920 Leasing: Total cost = Down payment + (Lease payment × Number of payments) + End-of-lease charges = $1,300 + ($460 × 48) + $650 = $24,030 b. You should choose the option with the lower total cost, which in this case is leasing.

Use the following data: Down payment (to finance vehicle)$ 7,800 Down payment for lease$ 3,100 Monthly loan payment$ 1,090 Monthly lease payment$ 820 Length of loan - 48months Length of lease - 48months Value of vehicle at end of loan$ 14,800 End-of-lease charges$ 1,550 a. What is the total cost for buying and for leasing a motor vehicle with a cash price of $45,500? b. Based on your answers in part a, would you recommend buying or leasing?

a.Buying: Total cost = Down payment + (Loan payment × Number of payments) − Ending vehicle value = $7,800 + ($1,090 × 48) − $14,800 = $45,320 Leasing: Total cost = Down payment + (Lease payment × Number of payments) + End-of-lease charges = $3,100 + ($820 × 48) + $1,550 = $44,010 b. You should choose the option with the lower total cost, which in this case is leasing.

(ch 2) Based on the following financial data, calculate the ratios requested. Liabilities$ 8,600 Net worth$ 62,000 Liquid assets$ 6,200 Current liabilities$ 1,500 Monthly credit payments$ 720 Take-home pay$ 2,675 Monthly savings$ 210 Gross income$ 3,050

a.Debt ratio = Liabilities/Net worth = $8,600/$62,000 = 0.1387 b.Current ratio = Liquid assets/Current liabilities = $6,200/$1,500 = 4.1333 c.Debt-payments ratio = Monthly credit payments/Take-home pay = $720/$2,675 = 0.2692 d.Savings ratio = Monthly savings/Gross income = $210/$3,050 = 0.0689

Based on Exhibit 7-7, what would be the monthly mortgage payments for each of the following situations?

a.Monthly mortgage payment = Mortgage payment factor × (Mortgage amount/$1,000) = $6.00 × ($158,500/$1,000) = $951.00 b.Monthly mortgage payment = $7.91 × ($216,500/$1,000) = $1,712.52 or $1,713 c.Monthly mortgage payment = $8.71 × ($198,000/$1,000) = $1,724.58 or $1,725

On December 30, you make a $3,200 charitable donation. a. If you are in the 32 percent tax bracket, how much will you save in taxes for the current year? b. If you deposit that tax savings in a savings account for the next six years at 7 percent, what will be the future value of that account? Use Exhibit 1-A.

a.Tax savings = Charitable donation × Tax rate = $3,200 × 0.32 = $1,024 b.FV of tax savings = Tax savings × FV factor = $1,024 × 1.501 = $1,537.02

Madeline Rollins is trying to decide whether she can afford a loan she needs in order to go to chiropractic school. Right now, Madeline is living at home and works in a shoe store, earning a gross income of $1,160 per month. Her employer deducts a total of $270 for taxes from her monthly pay. Madeline also pays $165 on several credit card debts each month. The loan she needs for chiropractic school will cost an additional $240 per month. Calculate her debt payments-to-income ratio with and without the college loan. (Remember the 20 percent rule.) Can she currently afford the school loan?

With college loan: Debt payments-to-income ratio = Total debt payments/Net take-home pay = ($165 + $240)/($1,160 − $270) = 0.4551, or 45.51% Without college loan: Debt payments-to-income ratio = Total debt payments/Net take-home pay = $165/($1,160 − $270) = 0.1854, or 18.54% According to the 20 percent rule, she cannot afford the college loan at this time.

Using time value of money tables (Exhibit 1-A, Exhibit 1-B, Exhibit 1-C, Exhibit 1-D), calculate the following. a. The future value of $590 six years from now at 8 percent. b. The future value of $775 saved each year for 10 years at 8 percent. c. The amount a person would have to deposit today (present value) at a 7 percent interest rate to have $3,600 five years from now. d. The amount a person would have to deposit today to be able to take out $600 a year for 5 years from an account earning 8 percent.

a) $590 × 1.587 = $936.33 (Exhibit 1-A) b) $775 × 14.487 = $11,227.43 (Exhibit 1-B) c) $3,600 × 0.713 = $2,566.80 (Exhibit 1-C) d) $600 × 3.993 = $2,395.80 (Exhibit 1-D)

Using the tax table, determine the amount of taxes for the following situations: a. A head of household with taxable income of $59,000. b. A single person with taxable income of $36,600. c. Married taxpayers filing jointly with taxable income of $72,800.

a. A head of household with taxable income of $59,000: $14,100 × 0.10 = $1,410.00 ($53,700 − $14,101) × 0.12 = $4,751.88 ($59,000 − $53,701) × 0.22 = $1,165.78 $1,410.00 + $4,751.88 + $1,165.78 = $7,327.66 b. A single person with taxable income of $36,600: $9,875 × 0.10 = $987.50 ($36,600 − $9,876) × 0.12 = $3,206.88 $987.50 + $3,206.88 = $4,194.38 c. Married taxpayers filing jointly with taxable income of $72,800: $19,750 × 0.10 = $1,975.00 ($72,800 − $19,751) × 0.12 = $6,365.88 $1,975.00 + $6,365.88 = $8,340.88

What would be the net annual cost of the following checking accounts? a. Monthly fee, $3.25; processing fee, 20 cents per check; checks written, an average of 12 a month. b. Interest earnings of 2 percent with a $450 minimum balance; average monthly balance, $900; monthly service charge of $10 for falling below the minimum balance, which occurs four times a year (no interest earned in these months). (

a. Net annual cost = 12 × [(Average number of checks per month × Cost per check) + Monthly fee] = 12 × [(12 × $0.20) + $3.25] = $67.80 b. Net annual cost = Service charges − Interest earnings = (4 × $10) − (8/12)(0.02 × $900) = $28.00

What would be the net annual cost of the following checking accounts? a. Monthly fee, $3.75; processing fee, 25 cents per check; checks written, an average of 16 a month. b. Interest earnings of 3 percent with a $600 minimum balance; average monthly balance, $700; monthly service charge of $15 for falling below the minimum balance, which occurs three times a year (no interest earned in these months).

a. Net annual cost = 12 × [(Average number of checks per month × Cost per check) + Monthly fee] = 12 × [(16 × $0.25) + $3.75] = $93.00 b. Net annual cost = Service charges − Interest earnings = (3 × $15) − (9/12)(0.03 × $700) = $29.25

Using the Rule of 72, approximate the following amounts. b. If you earn 11.5 percent on your investments, how long will it take for your money to double?

72/11.5 = 6.3 years

Net worth

= Assets − Liabilities

If a person spends $20 a week on coffee (assume $1,000 a year), what would be the future value of that amount over 10 years if the funds were deposited in an account earning 4 percent? Use Exhibit 1-B.

$1,000 × 12.006 = $12,006

Ben Collins plans to buy a house for $150,000. If the real estate in his area is expected to increase in value 1 percent each year, what will its approximate value be five years from now?

$150,000 × 1.051 = $157,650

ch 7) Based on the following data, calculate the items requested: Rental Costs Annual rent$ 8,280 Insurance$ 235 Security deposit$ 1,100 Buying Costs Annual mortgage payments$ 10,400(10,025 is interest) Property taxes$ 2,140 Down payment/closing costs$ 5,100 Growth in equity$ 375 Insurance/maintenance$ 1,950 Estimated annual appreciation$ 2,600 Assume an after-tax savings interest rate of 8 percent and a tax rate of 30 percent. Assume this individual has other tax deductions that exceed the standard deduction amount. a. Calculate total rental cost and total buying cost.

(SCREENSHOTTED IMAGE WITH MATH) After-tax interest lost on security deposit = After-tax interest rate × Security deposit = 0.08 × $1,100 = $88 After-tax interest lost on down payment, closing costs = After-tax interest rate × Down payment and closing costs = 0.08 × $5,100 = $408 Tax savings for mortgage interest = Tax rate × Mortgage interest = 0.30 × $10,025 = $3,008 Tax savings for property taxes = Tax rate × Property taxes = 0.30 × $2,140 = $642

What would be the annual percentage yield for a savings account that earned $31 in interest on $500 over the past 365 days?

Annual percentage yield = Annual interest/Principal = $31/$500 = 0.062, or 6.2%

In an attempt to have funds for a down payment in three years, James Dupont plans to save $4,700 a year for the next three years. With an interest rate of 4 percent, what amount will James have available for a down payment after the three years? Use Exhibit 1-B.

Future value down payment = Annual savings × Future value annuity factor = $4,700 × 3.122 = $14,673.40

What are the interest cost and the total amount due on a six-month loan of $1,100 at 14 percent simple annual interest?

Interest cost (I) = P × r × T = $1,100 × 0.140 × (6/12) = $77 Total amount due = Interest + Principal = $77 + $1,100 = $1,177

Kelly and Tim Jarowski plan to refinance their mortgage to obtain a lower interest rate. They will reduce their mortgage payments by $59 a month. Their closing costs for refinancing will be $1,700. How long will it take them to cover the cost of refinancing?

Number of months = Closing costs/Monthly payment reduction = $1,700/$59 = 28.81, or 29

Based on the data provided here, calculate the items requested: Annual depreciation $ 3,000 Annual mileage - 14,760 Current year's loan interest $ 710 Miles per gallon - 24 Insurance $ 875 License and registration fees $ 130 Average gasoline price $ 4.00per gallon Oil changes/repairs $ 760 Parking/tolls $ 680 a. Calculate total annual operating cost of the motor vehicle. b. Calculate operating cost per mile.

a.Total variable costs = [(Annual mileage/Miles per gallon) × Gas price per gallon] + Oil changes and repairs + Parking and tolls = [(14,760/24) × $4.00] + $760 + $680 = $3,900 Total fixed cost = Depreciation + Loan interest + Insurance + License and registration fees = $3,000 + $710 + $875 + $130 = $4,715 Total annual operating costs = Total variable costs + Total fixed costs = $3,900 + $4,715 = $8,615 b.Operating cost per mile = Total annual operating costs/Annual mileage = $8,615/14,760 = $0.58, or 58 cents per mile

A payday loan company charges 3.4 percent interest for a two-week period. What would be the annual interest rate from that company?

Annual interest rate = Interest rate per period × Number of periods per year = 0.034 × (52/2) = 0.884, or 88.4%

A payday loan company charges 4 percent interest for a two-week period. What would be the annual interest rate from that company?

Annual interest rate = Interest rate per period × Number of periods per year = 0.040 × (52/2) = 1.040, or 104.0%

What would be the annual percentage yield for a savings account that earned $92 in interest on $1,150 over the past 365 days?

Annual percentage yield = Annual interest/Principal = $92/$1,150 = 0.080, or 8.0%

What would be the average tax rate for a person who paid taxes of $7,751.51 on taxable income of $61,180?

Average tax rate = Total taxes/Taxable income = $7,751.51/$61,180 = 0.1267, or 12.67%

Using the Rule of 72, approximate the following amounts. a. If the value of land in an area is increasing 12.5 percent a year, how long will it take for property values to double?

72/12.5 = 5.8 years

Using the Rule of 72, approximate the following amounts. c. At an annual interest rate of 5.75 percent, how long will it take for your savings to double?

72/5.75 = 12.5 years

Estimate the affordable monthly mortgage payment, the affordable mortgage amount, and the affordable home purchase price for the following situation. Use Exhibit 7-6, Exhibit 7-7. Monthly gross income$ 3,470 Other debt (monthly payment)$ 230 15-year loan at 7 percent Down payment to be made (percent of purchase price) - 20 percent Monthly estimate for property taxes and insurance$ 220

Affordable monthly mortgage payment = (Monthly gross income × 0.38) − Monthly estimate for property taxes and insurance − Other debt = ($3,470 × 0.38) − $220 − $230 = $868.60, or $869 Affordable mortgage amount = Affordable monthly mortgage payment/Mortgage payment factor × $1,000 = $869/$8.99 × $1,000 = $96,662.96, or $96,663 Affordable home purchase = Affordable mortgage amount/(1 − Down payment percent) = $96,663/(1 − 0.20) = $120,828.75, or $120,829

ch 5) A few years ago, Simon Powell purchased a home for $220,000. Today, the home is worth $390,000. His remaining mortgage balance is $170,000. Assuming that Simon can borrow up to 80 percent of the market value, what is the maximum amount he can currently borrow against his home?

Amount available for borrowing = (Maximum loan percent × Current market value) − Current loan = (0.80 × $390,000) − $170,000 = $142,000

An ATM with a service fee of $4 is used by a person 200 times in a year. What would be the future value in 5 years (use a 5 percent rate) of the annual amount paid in ATM fees? Use Exhibit 1-B.

Annual fee = Service fee per transaction × Number of transactions per year = $4 × 200 = $800 Future value = Annual fee × FV annuity factor = $800 × 5.526 = $4,420.80

ch 4) An ATM with a service fee of $5 is used by a person 100 times in a year. What would be the future value in 6 years (use a 4 percent rate) of the annual amount paid in ATM fees? Use Exhibit 1-B.

Annual fee = Service fee per transaction × Number of transactions per year = $5 × 100 = $500 Future value = Annual fee × FV annuity factor = $500 × 6.633 = $3,316.50

Many locations require that renters be paid interest on their security deposits. If you have a security deposit of $2,100, how much interest would you expect to earn per year at 4 percent?

Annual interest = Interest rate × Security deposit = 0.04 × $2,100 = $84

Use the following data: Purchase Costs Down payment: $2,400 Loan payment: $420 for 48 months Estimated value at end of loan: $4,300 Opportunity cost interest rate: 2 percent per year Leasing Costs Security deposit: $800 Lease payment: $420 for 48 months End-of-lease charges: $645 Calculate the costs of buying versus leasing a motor vehicle.

Buying: Purchase cost = Down payment + [Down payment × Interest rate × (Number of months/12)] + (Loan payment × Number of payments) - Ending vehicle value = $2,400 + [$2,400 × 0.02 × (48/12)] + ($420 × 48) − $4,300 = $18,452 Leasing: Lease cost = [Security deposit × Interest rate × (Number of months/12)] + (Lease payment × Number of payments) + End-of-lease charges = [$800 × 0.02 × (48/12)] + ($420 × 48) + $645 = $20,869

cash flows

Cash inflows − Cash outflows = Difference A positive difference indicates a cash surplus while a negative difference indicates a cash deficit. Budgeted amount − Actual amount = Variance

John Walters is comparing the cost of credit to the cash price of an item. If John makes a down payment of $100 and pays $35 a month for 24 months, how much more will that amount be than the cash price of $701?

Cost of credit = Down payment + (Payment amount × Number of payments) − Cash price = $100 + ($35 × 24) − $701 = $239

John Walters is comparing the cost of credit to the cash price of an item. If John makes a down payment of $155 and pays $35 a month for 24 months, how much more will that amount be than the cash price of $723?

Cost of credit = Down payment + (Payment amount × Number of payments) − Cash price = $155 + ($35 × 24) − $723 = $272

The Fram family has liabilities of $125,000 and a net worth of $354,000. What is their debt ratio?

Debt ratio = Liabilities/Net worth = $125,000/$354,000 = 0.353

Julia Sims has $38,000 of adjusted gross income and $6,080 of medical expenses. She expects to itemize her tax deductions this year. The most recent tax year has a medical expenses floor of 10 percent. How much of a tax deduction for medical expenses will Julia be able to take?

Deductible medical expenses = Total medical expenses - (10% of adjusted gross income) = $6,080 - (0.1 × $38,000) = $2,280 If the deductible medical expenses are equal to or less than 10 percent of adjusted gross income, then there is no deduction for medical expenses.

A certificate of deposit often charges a penalty for withdrawing funds before the maturity date. If the penalty involves two months of interest, what would be the amount for early withdrawal on a CD paying 6 percent and valued at $30,000?

Early withdrawal penalty = Account value × Annual interest rate × (Number of penalty months/12) = $30,000 × 0.06 × 2/12 = $300.00

A certificate of deposit often charges a penalty for withdrawing funds before the maturity date. If the penalty involves three months of interest, what would be the amount for early withdrawal on a CD paying 7 percent and valued at $33,000?

Early withdrawal penalty = Account value × Annual interest rate × (Number of penalty months/12) = $33,000 × 0.07 × 3/12 = $577.50

A service contract for a video projection system costs $145 a year. You expect to use the system for three years. Instead of buying the service contract, what would be the future value of these annual amounts after three years if you earn 5 percent on your savings? Use Exhibit 1-B.

FV = Annual cost × Future value annuity factor = $145 × 3.153 = $457.19

A service contract for a video projection system costs $195 a year. You expect to use the system for four years. Instead of buying the service contract, what would be the future value of these annual amounts after four years if you earn 4 percent on your savings? Use Exhibit 1-B.

FV = Annual cost × Future value annuity factor = $195 × 4.246 = $827.97

Wendy Brooks prepares her own income tax return each year. A tax preparer would charge her $245 for this service. Over a period of 9 years, how much does Wendy gain from preparing her own tax return? Assume she can earn 2 percent on her savings. Use Exhibit 1-B.

FV = Annual savings × Future value annuity factor = $245 × 9.755 = $2,389.98

Noor Patel has had a busy year! She decided to take a cross-country adventure. Along the way, she won a new car on The Price Is Right (valued at $13,600) and $500 on a scratch-off lottery ticket (the first time she ever played). She also signed up for a credit card to start the trip and was given a sign-up bonus of $300. How much from these will she have to include in her federal taxable income?

Federal taxable income = Prizes + Lottery winnings + Credit card sign-up bonus = $13,600 + $500 + $300 = $14,400

Joshua borrowed $2,500 for one year and paid $150 in interest. The bank charged him a service charge of $22. If Joshua repaid the loan in 12 equal monthly payments, what is the APR?

Finance charge = Interest + Service charge = $150 + $22 = $172 APR = (2 × n × I)/[P(N + 1)] = (2 × 12 × $172)/[$2,500(12 + 1)] = 0.127, or 12.7%

Joshua borrowed $500 on January 1, 2021, and paid $30 in interest. The bank charged him a service charge of $22. He paid it all back at once on December 31, 2021. What was the APR?

Finance charge = Interest + Service charge = $30 + $22 = $52 APR = Finance charge/Principal = $52/$500 = 0.104, or 10.4%

If $4,355 were withheld during the year and taxes owed were $4,138, would the person owe an additional amount or receive a refund? What is the amount?

Tax due (refund) = Total tax − Tax withheld = $4,138 − $4,355 = −$217

If a person in a 32 percent tax bracket makes a deposit of $5,600 to a tax-deferred retirement account, what amount would be saved on current taxes?

Tax savings = Annual retirement contribution × Tax rate = $5,600 × 0.32 = $1,792

Based on the following data, would Beth and Roger Simmons receive a refund or owe additional taxes? What is the amount? Adjusted gross income$ 52,750 Standard deduction$ 24,800 Credit for child and dependent care expenses$ 480 Federal income tax withheld$ 6,820 Tax rate on taxable income - 15 percent

Taxable income would be $27,950 ($52,750 − $24,800) times the tax rate of 15 percent equals $4,192.50 less a tax credit of $480 gives a tax liability of $3,712.50. When compared to federal tax withheld ($6,820), the result is a refund of $3,107.50 ($6,820 − $3,712.50).

A bank that provides overdraft protection charges 14 percent for each $100 (or portion of $100) borrowed when an overdraft occurs. a. What amount of interest would the customer pay for a $480 overdraft? (Assume the interest is for the full amount borrowed for a whole year.) b. How much would be saved by using the overdraft protection loan if a customer has five overdraft charges of $45 each during the year?

a. Interest = Number of $100 increments × $100 × Interest rate = 5 × $100 × 0.140 = $70 b. Savings = (5 × $45) − $70 = $155

Sidney took a cash advance of $600 by using checks linked to her credit card account. The bank charges a cash advance fee of 2 percent on the amount borrowed and offers no grace period on cash advances. Sidney paid the balance in full when the bill arrived. a. What was the cash advance fee? b. What was the interest for one month at an APR of 18 percent? c. What was the total amount she paid? d. What amount would she have paid if she had made the purchase with her credit card and paid off her bill in full promptly? Assume the credit card has a 30-day grace period.

a. Cash advance fee = Cash advance fee percent × Cash advance amount = 0.02 × $600 = $12.00 b. Monthly interest = (Annual rate/12) × Cash advance amount = (0.18/12) × $600 = $9.00 c. Total amount paid = Cash advance fee + Monthly interest + Cash advance amount = $12.00 + $9.00 + $600 = $621.00 d. Total amount paid = Cash advance amount = $600.00 If her credit card did not have a grace period, then she would also have owed $9.00 for monthly interest.

Robert Sampson owns a townhouse valued at $187,000 and still has an unpaid mortgage of $152,000. In addition to his mortgage, he has the following liabilities: Visa. 765 MasterCard 400 Discover card 565 education loan 2,800 personal bank loan 850 auto loan 5,100 total $10,480 Robert's net worth (not including his home) is about $41,000. This equity is in mutual funds, an automobile, a coin collection, furniture, and other personal property. a. What is Robert's debt-to-equity ratio? b. Has he reached the upper limit of debt obligations?

a. Debt-to-equity ratio = Total debt excluding mortgage/Net worth excluding home = $10,480/$41,000 = 0.26 b. The upper limit of the debt-to-equity ratio is 1, so he has not reached his upper limit.

Use future value and present value calculations (use Exhibit 1-A, Exhibit 1-B, Exhibit 1-C) to determine the following: a. The future value of a $1,300 savings deposit after nine years at an annual interest rate of 8 percent. b. The future value of saving $3,200 a year for three years at an annual interest rate of 7 percent. c. The present value of a $3,400 savings account that will earn 4 percent interest for six years.

a. FV = $1,300 × 1.999 = $2,598.70 (Exhibit 1-A) b. FV = $3,200 × 3.215 = $10,288.00 (Exhibit 1-B) c. PV = $3,400 × 0.790 = $2,686.00 (Exhibit 1-C)

For each of these situations, determine the savings amount. Use the time value of money tables in Exhibit 1-A, Exhibit 1-B, and Exhibit 1-C. a. What would be the value of a savings account started with $400, earning 5 percent (compounded annually) after 5 years? b. Brenda Young desires to have $6,000 eight years from now for her daughter's college fund. If she will earn 6 percent (compounded annually) on her money, what amount should she deposit now? Use the present value of a single amount calculation. c. What amount would you have if you deposited $1,200 a year for 30 years at 5 percent (compounded annually)?

a. FV = $400 × 1.276 = $510 (Exhibit 1-A) b. PV = $6,000 × 0.627 = $3,762 (Exhibit 1-C) c. FV = $1,200 × 66.439 = $79,727 (Exhibit 1-B)

For each of these situations, determine the savings amount. Use the time value of money tables in Exhibit 1-A, Exhibit 1-B, and Exhibit 1-C. a. What would be the value of a savings account started with $550, earning 4 percent (compounded annually) after 11 years? b. Brenda Young desires to have $13,000 eight years from now for her daughter's college fund. If she will earn 8 percent (compounded annually) on her money, what amount should she deposit now? Use the present value of a single amount calculation. c. What amount would you have if you deposited $1,800 a year for 20 years at 5 percent (compounded annually)?

a. FV = $550 × 1.539 = $846 (Exhibit 1-A) b. PV = $13,000 × 0.540 = $7,020 (Exhibit 1-C) c. FV = $1,800 × 33.066 = $59,519 (Exhibit 1-B)

After visiting several automobile dealerships, Richard selects the car he wants. He likes its $10,500 price, but financing through the dealer is no bargain. He has $2,100 cash for a down payment, so he needs a loan of $8,400. In shopping at several banks for an installment loan, he learns that interest on most automobile loans is quoted at add-on rates. That is, during the life of the loan, interest is paid on the full amount borrowed even though a portion of the principal has been paid back. Richard borrows $8,400 for a period of two years at an add-on interest rate of 10 percent. a. What is the total interest on Richard's loan? b. What is the total cost of the car? c. What is the monthly payment? d. What is the annual percentage rate (APR)?

a. I = P × r × T= $8,400 × 0.10 × 2 = $1,680 b. Total cost = Down payment + Interest + Principal = $2,100 + $1,680 + $8,400 = $12,180 c. Monthly payment = (Interest + Principal)/Number of months = ($1,680 + $8,400)/(2 × 12) = $420 d. APR = (2 × n × I)/[P(N + 1)] = (2 × 12 × $1,680)/[$8,400(24 + 1)] = 0.1920, or 19.20%

A bank that provides overdraft protection charges 7 percent for each $100 (or portion of $100) borrowed when an overdraft occurs. a. What amount of interest would the customer pay for a $240 overdraft? (Assume the interest is for the full amount borrowed for a whole year.) b. How much would be saved by using the overdraft protection loan if a customer has three overdraft charges of $20 each during the year?

a. Interest = Number of $100 increments × $100 × Interest rate = 3 × $100 × 0.070 = $21 b. Savings = (3 × $20) − $21 = $39

Louise McIntyre's monthly gross income is $3,100. Her employer withholds $710 in federal, state, and local income taxes and $260 in Social Security taxes per month. Louise contributes $110 each month to her IRA. Her monthly credit payments for VISA and MasterCard are $70 and $65, respectively. Her monthly payment on an automobile loan is $370. a. What is Louise's debt payments-to-income ratio? b. Is Louise living within her means?

a. Net income = Gross income − Income taxes − Social Security taxes − IRA contribution = $3,100 − $710 − $260 − $110 = $2,020 Monthly debt payments = VISA + MasterCard + Car loan = $70 + $65 + $370 = $505 Debt payments-to-income ratio = Total debt payments/After-tax income = $505/$2,020 = 0.2500, or 25.00% b. Experts suggest that you spend no more than 20 percent of your net (after-tax) income on consumer credit payments. A debt payments-to-income ratio less than 20 percent indicates living within one's means, while a ratio in excess of 20 percent indicates an individual is living beyond his/her means.

A financial company that advertises on television will pay you $60,000 now for annual payments of $10,000 that you are expected to receive for a legal settlement over the next 10 years. Use Exhibit 1-D. a. What is the present value of the annual payments if you estimate the time value of money at 10 percent? b. Should you accept this offer?

a. $10,000 × 6.145 = $61,450 b. You are only being offered $60,000 for an annuity that is worth $61,450 to you. You should not accept this offer.

(ch 2) Use the following items to determine the total assets, total liabilities, net worth, total cash inflows, and total cash outflows. Rent for the month$ 1,450 Monthly take-home salary$ 2,985 Spending for food$ 745 Cash in checking account$ 610 Savings account balance$ 2,050 Balance of educational loan$ 3,120 Current value of automobile$ 9,500 Telephone bill paid for month$ 145 Credit card balance$ 315 Loan payment$ 240 Auto insurance$ 390 Household possessions$ 5,000 Video equipment$ 2,750 Payment for electricity$ 170 Lunches/parking at work$ 260 Donations$ 320 Personal computer$ 2,000 Value of stock investment$ 1,260 Clothing purchase$ 190 Restaurant spending$ 210

a.Total assets = Savings account balance + Current value of automobile + Video equipment + Personal computer + Cash in checking account + Household possessions + Value of stock investment = $2,050 + $9,500 + $2,750 + $2,000 + $610 + $5,000 + $1,260 = $23,170 b.Total liabilities = Credit card balance + Educational loan balance = $315 + $3,120 = $3,435 c.Net worth = Total assets − Total liabilities = $23,170 − $3,435 = $19,735 d.Total cash inflows = Monthly take-home salary = $2,985 e.Total cash outflows = Rent for the month + Spending for food + Auto insurance + Lunches/parking at work + Clothing purchase + Telephone bill paid for month + Loan payment + Payment for electricity + Donations + Restaurant spending = $1,450 + $745 + $390 + $260 + $190 + $145 + $240 + $170 + $320 + $210 = $4,120

Based on the data provided here, calculate the items requested: Annual depreciation$ 3,000 Annual mileage - 14,520 Current year's loan interest$ 700 Miles per gallon - 24 Insurance$ 845 License and registration fees$ 120 Average gasoline price$ 4.00 per gallon Oil changes/repairs$ 700 Parking/tolls$ 640 a. Calculate total annual operating cost of the motor vehicle. b. Calculate operating cost per mile.

a.Total variable costs = [(Annual mileage/Miles per gallon) × Gas price per gallon] + Oil changes and repairs + Parking and tolls = [(14,520/24) × $4.00] + $700 + $640 = $3,760 Total fixed cost = Depreciation + Loan interest + Insurance + License and registration fees = $3,000 + $700 + $845 + $120 = $4,665 Total annual operating costs = Total variable costs + Total fixed costs = $3,760 + $4,665 = $8,425 b.Operating cost per mile = Total annual operating costs/Annual mileage = $8,425/14,520 = $0.58, or 58 cents per mile

unit prices

price/units ex. Unit price = $1.80/2.0 quarts = $0.9000, or 90.00 cents per quart

rule of 72

time = 72/interest rate