Chapter 1-7 Quiz

Assume the following: Item Value Liquid assets $ 16,000 Current liabilities (credit cards)$ 3,000 Student debt $25,000 Investments in 401-K plan$89,000 Salary$50,000 Value of Home $250,000 Due on Mortgage $175,000 Household assets$20,000 What is this person's net worth?

$ 172,000 Assets-Liabilities=Net Worth Assets: 16,000+89,000+250,000+20,000= 375,000 Liabilities: 3,000+25,000+175,000=203,000 375,000-203,000= 172,000

A UCF graduate has 3 bank overdrafts per year, and the bank charges $35 per overdraft. The bank pays the graduate 1% interest per annum, and he/she maintains an average monthly balance of $600. What is the graduate's net annual cost of maintaining the checking account after giving effect to the interest earned (ignore taxes)?

$ 99 net cost $35(3) = $105 Cash back- 600(0.01) = $6 $105 - $6 = $99 net cost

Try to solve this problem without a calculator to help fine tune your financial skills. Assume you have an AMEX card which pays a 2% cash rebate on all purchases, and a VISA card which pays a 1% cash rebate on all purchases. Gas stations A and B both show a price of $2.00 per gallon, but station A does NOT accept AMEX cards while station B does. How much more expensive is the gas at station A assuming you use your VISA card instead of the AMEX card?

$0.02/gallon

Refer to the Personal Financial Statement excel file under Modules Chapter 3. What is total cash used for financing activities (paying down debt)?

$1,500

A student's bank statement reflects $1,600 at month end. The student's checkbook, before reconciling, reflects $1,500. The student has $20 of interest on the bank statement which has not been posted to his/her checkbook, deposits in transit of $115, and outstanding checks of $195. What is the reconciled bank balance?

$1,520 Reconcile = balance per bank statement + deposits in transit - outstanding checks not clearing = 1600 + 115 - 195 = 1520

Assume the following for a 401-K plan. Annual salary = $72,000 Monthly salary = $6,000 Pay date = End of each month Amount you save in 401-K = 5% of salary Amount of employer match = 4% of salary How much will you have in the 401-K plan after 40 years assuming a 8% investment return? (Round to the nearest dollar)

$1,885,144 Future Value End mode P/Yr= 12 N = 40 I = 8 PMT = -540 (6,000*(5%+4%)) FV = ? $1,885,144

An employee makes $120,000 per year and saves 7% of his/her salary in the company's 401-K plan. The company matches 4% of the salary when the employee saves up to 5%. Further, the employee pays $2,000 per year in health insurance premiums for a family health insurance plan from the employer. What will be the W-2 compensation for this employee?

$109,600 W-2 income = Salary - 401-K Savings - Health insurance premiums - flexible spending account savings for out of pocket health care 120,000(.07)=8,400 =120,000-8400-2000 =109,600

A student takes a $400 cash advance on his credit card in January. The cash advance fee is 2% of the amount withdrawn. In addition, he/she does not pay off the $400 balance on the credit card at month end. The credit card carries an 12% per annum interest rate. The student just received his February credit card statement. Assuming the beginning January 1 balance was zero, how much money could the student have saved in January had he/she not taken out the cash advance and paid off the balance due on time?

$12 Cash advance= 400*0.02= 8 Interest= 400*(0.12/12)= 4 (400x0.02)+(400x0.01)= 12 Principal= 400 Total= 412 Savings= 12

A homeowner paid $75,000 for his/her house and after several refinancings now owes $140,000 on the mortgage. The house is currently worth $200,000. A bank will provide home equity loans up to 80% of the value of the house. What is the maximum amount the homeowner could borrow on a home equity loan?

$20,000 (200,000*0.80)=160,000 (160,000-140,000)=20,000

Please refer to the Personal Financial Statement excel file under Modules Chapter 3. Print out this file, and insert the numbers at the bottom of the page into each applicable financial statement (use the copy command, not the cut and paste command). Each number goes in only one spot, and be sure your balance sheet balances! After you complete the exercise, answer the following questions: What are the total assets?

$203,000

The FDIC and NCUA insure non-retirement accounts in banks, savings & loans, and credit unions for up to

$250,000

If you finance a car with a dealer, most likely you'll pay interest calculated with the "add on interest" or "tack on interest" method (which not surprisingly works in the favor of the dealer). During the life of the loan, interest is paid on the full amount borrowed, even though some principal is paid back each month. A student buys a car as follows: Down payment - $ 2,000 Amount financed - $ 12,000 Total cost of car - $14,000 Finance charge - Add on interest @ 10% per annum over 4 years (48 months) What is the monthly payment and APR of this loan using your HP 10BII?

$350/month with an APR of 17.6%

What is the AFTER TAX value of a $5,100 taxable (pre-tax) benefit, assuming a 10% marginal tax rate?

$4,590.00 After-tax benefit value = Pre-tax benefit*(1-tax rate) = $5100(1-.10)= $4,590

A UCF graduate is offered a salary of $36,000 on Jan. 1, 2021 and expects to receive 3.0% raises each year thereafter on Jan. 1. What would be his/her salary in 2026? (Round to the nearest dollar, this is a future value of a single sum TVM problem)

$41,734 End Mode P/Yr=1 PV = -36000 N = 5 I = 3 FV = ? $41734

Using a UCF graduate's current year tax data below, what is the adjusted gross income: Wages = $55,000 Ordinary dividends = $1,000 Interest on municipal bonds = $2,000 Traditional IRA contribution = $3,000 Short term capital gain = $ 9,000 Alimony paid = $20,000 (pre 2019 divorce)

$42,000 Adjusted Gross Income= Wages+Dividends+Short term capital gains- IRA contribution-Alimony paid 55,000+1,000+9,000-3,000-20,000=42,000

Please refer to the Personal Financial Statement excel file in Module Chapter 3. See the income statement. How much of Total Income is non-cash?

$5,000

A UCF graduate is earning $44,000 a year in Orlando, and has an offer to move to a city where the cost of living is 15% higher. What would be the minimum salary this graduate would need to maintain the same standard of living?

$50,600 = Salary * cost of living percentage + Salary = $44000 * 0.15 + 44000 = $50,600

A UCF graduate has $110,000 of adjusted gross income and $11,500 of qualifying medical expenses. This individual's itemized deductions for medical expenses in 2020 (where the limitation is 10%) would be:

$500 Medical Expenses-AGI Limitation =11,500- (110,000*0.10) =500

Please refer to the Personal Financial Statement excel file under Modules Chapter 3. What is the net worth at year end?

$58,000

A student borrows $500 for one year, and is charged $50 in interest. He/she also pays a fee of $10 for the loan. What is the total cost of financing and the APR?

$60 financing cost with a 12% APR Interest= $50 Fee= $10 Total Cost= (50+10)=60 APR= 60/500=12%

A student has two credit card offers. Credit card "A" has an 19% per annum interest rate with no fee, while credit card "B" has an 12% per annum interest rate with a $50 annual fee. If the student maintains an average balance at month end in excess of $______, he/she should select the card "B" which has a lower rate with an annual fee. (i.e. what is the break-even point?) Instructor's note: You will never get ahead financially in life by carrying high cost credit card balances each month. The ideal solution is to get a card with no fee and pay it off monthly. Notwithstanding my advice, I recognize that some of you will indulge anyway, so you might as well know how to get the best deal!

$714.29 19%-12%=7% $50/0.07= $714.29

If a student has a net worth of $50,000 and liabilities of $30,000, what are his/her total assets?

$80,000 Assets-Liabilities=Net Worth 50,000+30,000=80,000

A UCF graduate is getting a masters degree at night. The graduate expects to receive an annual salary of $7,000 per year more as a result of getting a masters degree. The graduate plans to work for 40 years, so he/she will earn $280,000 more in their lifetime ($7,000 x 40 years). What is the present value of a stream of $7,000 payments for 40 years based on an annual interest rate of 7%? Assume the $7,000 is paid annually at the END of the year. By the way, if it costs say $25,000 today to get a masters degree, do you think a graduate degree is a smart economic move if your salary goes up by $7,000 per year? Hint: Calculate Net Present Value

$93,322, yes get the masters degree, the net present value of this decision is $68,322. Present Value 1 P/YR End mode PMT = -7000 I = 7 N = 40 PV = $93,322 Net Present Value 1 P/YR End mode CFj = -25000 CFj = 7000 shift Nj (orange) = 40 I = 7 shift NPV (orange) = $68,322

Assume the following exchange rates are "market" rates today: 1 Euro = 1.50 US dollars OR 1 US dollar = .6667 Euros You are planning to exchange $5,000 US dollars for Euros. Which of the following bank deals will give you the most Euros? Hint: See the excel file in the Modules Chapter 5 for an illustration of how to solve this problem.

1 US dollar = .7142 Euros; Exchange fee = 2%

In general, experts advise that one must save _______ of your salary in order to have sufficient funds to maintain your standard of living in retirement (this % would include both your 401-K savings and the employer match and other savings).

10 - 15%

Under the compare checking accounts page, click on "Avoid the $10 monthly service fee" and a pop-up box will appear. Using the information listed in the pop-up, which of the following occurring in each statement cycle will NOT result in waiving the normal monthly fee?

10 debit card purchases and/or payments per month

Using the same data as #7 above, how long would it take to pay off the credit card debt if the payments were increased to $600/month? (Note: If the website does not work, you can solve this on your HP. Use 12 payments per year)

20 months

What is the effective interest rate on a 20% APR credit card with interest compounded daily?

22.13% EAR= (1+APR/M)^M-1 (1+0.20/365)^365-1=22.13

Experts advise that your debt payments to take home pay ratio should not exceed 20%. A homeowner has the following monthly income and expenses: Item Value Gross salary$2,000 Taxes/social security$ 300 Visa card payments$ 35 Mastercard payments$ 30 Discover card payments$ 20 Auto loan payments$ 300 What is the homeowner's "debt payments to take home pay" ratio?

22.6% Gross Salary-Taxes/Social Security (2,000-300)=1,700 Visa+Mastercard+Discover+Auto Loan (35+30+20+300)=385 (385/1700)=22.6

This question is based on a true story. A Navy petty officer needs cash and goes to a paycheck advance company for some money. He/she agrees to pay $560 in two weeks (when his/her paycheck arrives) in exchange for $500 today. What is the interest rate implicit in this loan? Hint: This is a TVM problem, and the payments per year should be listed as 365, with n = 14.

297% P/Y= 365 N= 14 PMT= 0 FV= 560 PV= -500 I=? 296.66

A UCF graduate has $8,000 of debt excluding her house and a net worth of $30,000 ($24,000 excluding her house). What is the graduate's debt to net worth ratio exclusive of the house? Experts say the ideal target ratio should not exceed 1 (100%).

33.3% (8,000/24,000)=33.33

A UCF graduate has two credit cards, each having a $5,000 credit limit (a total of $10,000). The graduate currently owes $4,000. What is the debt to credit limit ratio?

40%, and the lower the ratio the better the credit score Credit card 1 limit= 5,000 Credit card 2 limit= 5,000 Total=10,000 Balance due=4,000 (4,000/10,000)= 0.40

Using data from the web work, how long will it take to pay off a $10,000 credit card debt at 18% interest per annum with payments of $300/month? (Note: if the website does not work, you can solve this on your HP. Use 12 payments per year)

47 months

It's time for another financial calculator problem. A UCF student (who has not taken FIN 2100) decides that he really needs a large screen HD TV for football season. The student goes to a "rent to own" center and agrees to rent a TV for $60 per month (end of month). After 36 months, the student will own the TV. Assuming that the student could buy the same TV today for $1,000, what is the interest rate (APR) of renting the TV? (Hint: Think of this as a $1,000 loan today from the rental company paid back at $60/month for 36 months).

59% P/Y= 12 N= 36 PV= 1000 PMT= -60 I=? 59.33%

Assume the following: Pre-tax return = 14.0% Tax rate = 25% Inflation rate = 4% What is your real return?

6.5% After Tax Return= (Pre-tax return)*(1-Tax Rate) 0.14*(1-0.25)=0.105 Real Return=After Tax Return-Inflation Rate 0.105-0.04=0.065

Most of the information in your credit file may be reported for only _________ years (if you have not declared bankruptcy).

7 (10 years if you have declared bankruptcy)

Using the Rule of 72, approximately how long does it take for your money to double in value if you earn a 8% annual return?

9 years

What do you call a check that a bank writes on its own account made payable to a third party on your behalf?

A cashier's check

Bankruptcy will be reported on your credit report for seven years with the exception of:

A chapter 7 bankruptcy (Late payment and Foreclosures will be reported on your credit report for 7 years) *Chapter 7 bankruptcy up to 10 years

Which of the following is NOT one of the primary financial statements?

A check register

Which of the following would NOT be excluded from taxable income?

A company car allowance

Which of the following is TRUE?

Answers A and C are true. a) More and more employers are using credit reports as hiring tools. c) Job applicants will be told if credit histories are being used in the hiring process on the application.

With respect to the taxability of corporate dividends paid to individuals and capital gains on stocks and bonds,

Both dividends from corporations and capital gains are taxable to individuals

Which of the following is not one of the five Cs of credit?

Climate 5 Cs of Credit (Character, Capacity,Capital,Collateral, Conditions)

Open the Excel File in Module Chapter 3 titled Long Range Financial Forecast. Under the "Yearly Budget" Tab, find net income for the current year (cells B 3 and O 59) & record it. Under the "Long Range" Tab, find projected net worth for the last year shown (cell I 62) & record it. Go back to the first worksheet tab. Under the Yearly Budget Tab, find line 27, Clothing. Change the Clothing Budget from $200 to $150 for each month (cells C 27 through N 27). What is the change in net income for the current year and the projected net worth for the last year shown in the Long Range Tab (column I) as a result of this budget savings? For you future financial planners, what changes would you recommend to help this individual achieve a net worth of $250,000 five years from now?

Current year net income goes from $19,313.68 to $19,916.10. The last year's net worth goes from $233,685.54 to $237,638.06

Assume the following: Assets = $110,000 Liabilities = $87,500 Net Worth = $35,000 Monthly credit payments = $1,640 Monthly take home pay = $8,200 What is the debt to net worth ratio and debt payments ratio for this individual?

Debt ratio = 2.5 Debt payments ratio = .20 Debt to Net Worth ratio= Liabilities/Net Worth 87,500/35,000=2.5 Debt Payments Ratio= Monthly credit pmts/ Take Home Pay 1,640/8,200=.20

An example of tax-exempt income is

Dividends from a mutual fund representing interest on municipal bonds.

You just received a copy of an email from an unknown investment advisor to a client recommending the purchase of a stock. The email appears to have been sent to you by mistake. The stock trades for $1.37/share and you could easily afford to buy 300 shares. The broker believes that the company will announce some significant positive news in the near future that will cause the stock to increase. The short term target price is $2.00/share, and the long term target price is $4.50/share. What is your best course of action?

Do nothing. This is probably a scam. Donot trust the information in this email.Do not believe the advice from the broker.

A $1,000 tax deduction is more valuable than a $300 tax credit (assuming the taxpayer is in a 24% tax bracket).

False $1000*0.24 = $240 < $300

A formalized report that summarizes your current financial situation, analyzes your financial needs, and recommends a direction for your financial activities is a(n):

Financial Plan.

An example of an adjustment that is subtracted from gross income to compute "adjusted gross income" or "AGI" is:

IRA contributions (traditional IRA)

Recently, the HIGHEST unemployment rates have been for:

Individuals who did not complete high school

Which of the following assets is NOT protected (or excluded) from a bankruptcy filing (meaning that creditors may be entitled to some or all of the asset):

Inherited IRA accounts Protected (Annuities, Your 401-K accounts, Your IRA account, Pension payments)

An individual who has an adjustable rate mortgage (ARM) is primarily concerned about _____ risk.

Interest Rate

In the event that an individual believes that interest rates are likely to move UP in the next year or two, what actions should he/she take?

Invest short (such as short term CDs); borrow long term at fixed rates

A UCF graduate has two job offers. Job 1 pays $35,100 with a $5,000 non-taxable benefit, while Job 2 pays $34,900 and has a $5,700 non-taxable benefit. What is the PRE-TAX value of each job assuming the graduate is in a 10% marginal tax bracket? (Round to the nearest dollar)

Job 1: $40,656 Job 2: $41,233 Pre-Tax Value = After tax benefit / (1-tax rate) Job 1: Pre- Tax Value = $5000 / (1-.10)= $5555.56 + Salary = $5555.56 + $35100 = $40,656 Job 2: Pre- Tax Value = $5700/0.90= $6333.33 + 34900 = $41,233

A taxpayer has $10,000 in charitable contributions and will be using Schedule A with no limitations. The taxpayer is in the 35% marginal tax bracket. The charitable contribution reduced taxable income and his/her taxes by:

Taxable income is $10,000 lower; taxes reduced by $3,500. Taxable income is $10,000 lower because of the charitable contribution of $10,000 with no limitations. Since they are in the 35% tax bracket, 0.35*10,000, there taxes are reduced by $3500

Refer the Bankrate web site discussed in the web work. Find the savings rate and mortgage rate boxes (NATIONAL AVERAGES). Which of the following is a TRUE statement?

The 30 year fixed rate mortgage rate is higher than the 15 year fixed rate mortgage.

Your bank has two checking account options, one pays tax-free interest at a rate of 3% per annum and the other pays taxable interest at a rate of 4.5% per annum. You are currently in a 24% marginal tax bracket. If you converted the tax-free interest rate to the comparable taxable interest rate you would find that:

The comparable taxable rate is 3.95%, thus you should select the taxable account. r*(1-0.24)=0.03 r=0.03/0.76 r=0.0395

Note: If you print Form 1040 & Schedule A from the IRS site (see the Web Work) it will help with this question. A SINGLE person is qualified to take a $12,400 standard deduction in 2020. The medical limitation is 7.5% in 2020. The taxpayer has adjusted gross income of $100,000 and the following items: Qualifying medical expenses = $11,000 Home mortgage interest = $10,000 (the mortgage is less than $750,000) Property taxes = $2,000 Gifts to charity = $1,000 With respect to their deductions on Schedule A:

The itemized deductions are $16,500, thus taxpayer should use Schedule A. 0.075*100,000=7,500 11,000-7,500=3,500 Itemized deductions = Qualifying medical expenses + property tax + gifts to charity + home mortgage interest =3,500+2,000+1,000+10,000 =16,500

A money market mutual fund that invested in commercial paper issued by corporations would generally be considered a low risk investment.

True

Individuals should generally be careful when considering financial advice from those in the financial services industry since often times there can be a conflict of interest.

True

Not having health insurance or a sufficient amount of personal liability insurance can result in a bankruptcy filing even for individuals who have been savers throughout their lifetime.

True

The recent trend is for the federal government and corporations to shift more responsibility to the individual with respect to providing for their financial future.

True

The slope of the treasury yield curve normally reflects increasing interest rates over time, and represents the cost of borrowing for the US government.

True

Refer to the Web Work regarding free credit reports. Which of the following is NOT required to obtain your free credit report?

Your credit card number (Your name and address, Your social security number, Your date of birth are required to obtain free credit report)

Note: If you print a Form 1040 Schedule A from the IRS site (see the Web Work) it will help with this question. _______________ is (are) fully deductible as an itemized deduction on Schedule A.

a) Interest on a $750,000 mortgage for a home which is your primary residence