Finance Final Exam Study Guide
Making financial decisions related to income involves all of the following except
Taking
The consumer price index measures:
The average change in prices of a fixed basket of goods and services of urban consumers
An example of a personal opportunity cost would be
Time comparing several brands of personal computers.
Jim Johnson was laid off from his job two months ago. He just received an offer for a position that pays 3/4 the salary of his old job. Why should he set up a financial plan?
To increase the effectiveness of obtaining, using, and protecting his financial resources.
An opportunity cost is what a person gives up when a choice is made.
True
Financial Plans are created by individuals as well as by financial planners or by using a money management software package.
True
Inflation is a rise in the general level of prices and it reduces the buying power of the dollar.
True
Personal financial planning is the process of managing your money to achieve personal economic satisfaction.
True
Personal opportunity costs refer to resources, such as time, health, and energy, that are given up when a choice is made.
True
Purchasing a car is an example of a durable-product goal.
True
Retirement planning includes thinking about your housing situation, recreational activities, and possible volunteer or part-time work.
True
Risks associated with many financial decisions are difficult to identify and evaluate.
True
Short-term goals are usually achieved within the next year or so.
True
The life situation of a household includes a combination of personal factors such as age, income, household size, and personal beliefs.
True
When prices are increasing at a rate of 4 percent, the cost of products would double in about 18 years.
True
To calculate the time value of money, we need to consider all of the following except the
Type of investment.
The Rule of 72 is:
Used to estimate how fast prices will double using a given annual inflation rate
If I can invest a dollar today and earn interest on it, then it should be worth _________ in the future.
more
Attempts to increase income through employment are part of the _____________ component of financial planning.
obtaining
The tangible and intangible factors that create a less than desirable situation is referred to as ____________ risk.
personal
If a $10,000 investment earns a 4 % annual return, what should its value be after one year?
$10,400
Darlene Wilson has the following financial amounts: checking account balance $990, savings account $3,600, credit card balance $1,570, jewelry $1,735, current market value of home $98,000, a mortgage on the home of $73,500. What is the total value of Darlene's assets?
$104,325
If Melinda Miller estimates that her $100 weekly grocery bill will increase at an annual inflation rate of 4%, what should her weekly grocery bill be in 3 years?
$112.50
If a $10,000 investment earns a 7% annual return, what should its value be after 6 years?
$15,010
If you deposit $500 into a Certificate of Deposit earning 3%, what would be your earnings after 12 months?
$15.00
Randy Hill wants to retire in 20 years with $1,000,000. If he can earn 10% per year on his investments, how much does he need to deposit each year to reach his goal? Round your answer to the nearest dollar.
$17,460
If you begin saving $2,000 a year at 5% (from age 22 to age 30 or 9 years), what will these funds grow to in this time period?
$22,054
During the past month, Jennifer Johnson had income of $3,260 but had to use some of her liquid savings to cover her monthly expenses. This resulted in a decrease in net worth of $340. This means Jennifer's monthly expenses for the month were:
$3,600.
A family with $80,000 in assets and $48,000 of liabilities would have a net worth of
$32,000.
Patrick Guitman has a net worth of $154,000 and liabilities of $173,000. What are his total assets?
$327,000
Given the following information, calculate the net worth: Assets = $7,400 Cash inflows = $6,800 Cash outflows = $4,400 Liabilities = $3,300
$4,100
Rebecca Wilson's monthly budget had planned spending of $396 for a new wardrobe in June. She actually spent $439. What is her budget variance?
$43 Deficit
Rebecca Wilson budgeted $1,262 for housing and utilities in July. She actually spent $1,180. What is her budget variance?
$82 Surplus
If you want $1,000 three years from now and you earn 4 percent on your savings, how much do you need to deposit now?
$889
Susan Smith has a goal of "saving $25 per month for a TV". Considering the SMART approach, Susan's goal lacks
A time frame
The major function of personal financial planning is to
Achieve personal economic satisfaction.
The stages in the family situation and financial needs of an adult is called the
Adult life cycle
The goal of purchasing a long-term care insurance policy would be most appropriate for
An older single person with children.
Which of the following situations describes a person who could be insolvent?
Assets $40,300; liabilities $45,700
Who is less likely to be harmed by inflation?
Borrowers
The problem of bankruptcy is associated with overuse and misuse of credit in the ______________ component of financial planning.
Borrowing
Interest earned is calculated by multiplying the principal times the time value of money.
False
Intermediate goals are usually achieved within the next year or so.
False
Opportunity costs refer to money already spent.
False
Planned spending through budgeting is part of the "spending" component of financial planning activities.
False
Purchasing an appliance is an example of a consumable-product goal.
False
Risks associated with many financial decisions are easy to identify and evaluate.
False
Short-term goals are usually achieved within three years.
False
The financial activities for a young, single person will probably be the same as those for an older couple with no dependent children at home.
False
There are only 3 methods of calculating time value of money.
False
There are only 3 possible courses of action when developing alternatives for decision making.
False
The goal of investing $50 per month for the next 12 years for your nephew's college fund is a(n) __________ goal.
Long-term
Increased consumer saving and investing is likely to be accompanied by
Lower interest rates
The 'borrowing' component in a financial plan relates to
Maintaining control over credit-buying habits
Given the following information, calculate the liquidity ratio: (Round your answer to 2 decimal places.) Liabilities = $37,500 Liquid assets = $7,500 Monthly credit payments = $1,450 Monthly savings = $1,150 Net worth = $92,000 Current liabilities = $2,900 Take-home pay = $3,600 Gross income = $7,400 Monthly expenses = $4,640
1.62
Given the following information, calculate the current ratio: (Round your answer to 2 decimal places.) Liquid assets = $5,900 Monthly credit payments = $1,050 Monthly savings = $910 Net worth = $80,000 Current liabilities = $2,100 Take-home pay = $2,800 Gross income = $5,000 Monthly expenses = $3,040
2.81
Given the following information, calculate debt payments ratio percentage. (Round your answer to 2 decimal places.) Liabilities = $27,500 Liquid assets = $5,500 Monthly credit payments = $950 Monthly savings = $850 Net worth = $77,000 Current liabilities = $1,900 Take-home pay = $2,600 Gross income = $4,400 Monthly expenses = $2,640
36.54%
Place the following steps for a personal financial plan in the proper order: 1. Review and revise the financial plan 2. Identify alternative courses of action 3. Create and implement your financial action plan 4. Determine your current financial situation 5. Evaluate alternatives 6. Develop your financial goals
4, 6, 2, 5, 3, 1
Inflation is most harmful to people with incomes expected to increase.
False
Given the following information, calculate the debt ratio percentage: (Round your answer to 2 decimal places.) Liabilities = $41,500 Liquid assets = $8,300 Monthly credit payments = $1,650 Monthly savings = $1,270 Net worth = $98,000 Take-home pay = $4,000 Gross income = $8,600 Monthly expenses = $5,440
42.35%
If a $10,000 investment earns interest of $500 in one year, what is its rate of return?
5 percent
Given the following information, calculate savings ratio percentage. (Round your answer to 2 decimal places.) Liabilities = $34,500 Liquid assets = $6,900 Monthly credit payments = $1,300 Monthly savings = $560 Net worth = $87,500 Current liabilities = $2,600 Take-home pay = $3,300 Gross income = $6,500 Monthly expenses = $4,040
8.62%
If inflation is expected to be 8 percent, how long will it take for prices to double?
9 years
The saving component of financial planning focuses on long-term security and includes:
A regular savings plan for emergencies
Future value computations are often referred to as
Compounding.
The first step of the financial planning process is to
Determine your current financial situation.
Present value computations are also referred to as
Discounting.
_________ goals relate to infrequently purchased, expensive tangible items.
Durable-product
The actual cost of living increase for a household will be:
Either greater than or less than the inflation rate as reported by the CPI depending on the household's cost of necessities purchased
Using the services of financial institutions or financial specialists (such as insurance agents, certified financial planners or investment advisers) to seek relevant information is done in which step in the financial planning process?
Evaluate your alternatives.
Every decision involves uncertainty, which is referred to as
Evaluating risk.
$500 on deposit at 6% for 6 months would earn $20.
False
A financial plan can only be created using a money management software package.
False
A financial plan is an informal report that analyzes past financial decisions.
False
As borrowing by consumers and businesses increases, interest rates are likely to decrease.
False
Financial Plans are only created by financial planners.
False
A formalized report that summarizes your current financial situation, analyzes your financial needs, and recommends future financial activities is a(n)
Financial plan.
Which of the following is correct?
Food and clothing are consumable-product goals
Which of the following is an example of a financial opportunity cost?
Forgoing wages to attend school
Paul Davis wants to deposit a lump sum of money today for a vacation that he plans to take to Asia after he graduates from Graduate School. Which formula should he use to determine the amount of money he will have available for his vacation?
Future value of a single amount
Tim Taylor received a $500 gift from his grandparents. He wants to invest this money for the down payment of a house that he plans to purchase in 3 years. What type of computation should he use?
Future value of a single amount
Jennifer Rodriguez plans to attend graduate school in 5 years. She thinks that she will need a total of $32,000 to pay for school, and she wants to save money each month to reach her goal. What type of computation should she use?
Future value of an annuity
Steve Wilson wants to deposit $150 per month into an account earning 4 percent for the next 3 years, so he can purchase a used car at that time. What type of computation would he use to determine the amount he will have accumulated for his purchase?
Future value of an annuity
An investor should expect to receive a risk premium for
Higher uncertainty about getting his/her money back
Patrick Guitman recently graduated from college with $20,000 in student loans and $5,000 in credit card debt. He usually makes minimum payments on his debt and he has been late with three payments in the last year. He wants to buy a new car but was told that his interest rate on a loan would be very high. What is the most likely reason this might be so?
His credit rating is below average which results in a higher interest rate
To develop financial goals, one should
Identify specific, realistic goals that are measurable along with a time frame and an action plan
An advantage of effective personal financial planning is:
Increased control of financial affairs
Which of the following long-term goals is stated most clearly using the SMART approach?
Invest $50 per month for the next 12 years for my nephew's college fund
Robert Brown is interested in attending a concert next weekend. Unfortunately, he is scheduled to work. If he finds a substitute for his shift so he can attend the concert, what kind of cost is he incurring?
Personal opportunity cost relating to time
Which of the following would increase the interest rate for a loan?
Poor credit rating
Rhonda Miller wants to take out a 4 year loan to purchase a car. What type of computation would she use to calculate her monthly payments?
Present value of an annuity
Which of the following intermediate goals is stated most clearly using the SMART approach?
Purchase a house within the next 5 years with a mortgage no greater than $150,000
The step in the personal financial planning process that follows immediately after the step: "Create and implement your financial action plan" is
Review and revise the financial plan
Changes in personal, social, and economic factors may require you to
Review and revise your financial plan more frequently.
Which of the following goals would be the easiest to implement and measure?
Save $100 a month to create a $2,400 emergency fund in 2 years.
Opportunity cost refers to
What you give up by making a choice.
Which of the following short-term goals is stated most clearly using the SMART approach?
Within the next 6 months, buy a car for less than $15,000
The rising or falling of prices that causes changes in buying power is referred to as ____________ risk.
inflation
Changes in the cost of money is referred to as ____________ risk.
interest-rate
The difficulty of converting savings and investments to cash is referred to as ____________ risk.
liquidity
