FIN 353 EXAM 1
C3: Darrin and Kathi are both 44 years of age. They came to your office today and provided the following financial information:• Cash and Cash Equivalents - $333,333• Investment Assets - $333,333• Personal Use Assets - $333,333• Current Liabilities - $100,000• Long-Term Liabilities - $250,000After meeting with them you created a pie chart to visually depict their current balance sheet. Utilizing targeted benchmarks, which of the following statements are you most likely to make during you next meeting?
"Compared to the other assets, the investment asset holdings are appropriate." (The cash and cash equivalents is high at 33%. It should be between 5% - 20%. Although the investment assets and the personal use assets are within the normal range - they are really too low when compared to the significant holdings in cash and cash equivalents. The liabilities and the net worth are within the normal range. Note that the net worth is equal to the assets minus the liabilities ($1,000,000 - $350,000 = $650,000).)
C1: Reverend Lola Pak, a prospective client, came to your office for the first time today. Which is the most appropriate way to greet her?
"Welcome to my office, Reverend Pak."
C3:Your new client, Kerri, age 35, came into your office today. She provided you with the following information for the year:• Income - $100,000• Taxes - $18,000• Rent - $14,000• Living Expenses - $40,000• Credit Card Debt - $12,000• Savings - $5,000• Student Loan Payments - $5,000• Car Payment - $6,000After receiving this information you created a pie chart to visually depict where her income was spent. Utilizing targeted benchmarks which of the following statements are you most likely to make during you next meeting?
"Your current living expenses are within the normal range." (The current living expenses are at 40% which is within the normal range of 40% - 60%. The rent is at 14% which is within the normal range of 0 - 28%. The housing and debt percentage is 37% (rent of $14,000 + credit card debt of $12,000 + student loan payments of $5,000 and car payment of $6,000) which is above the normal range of 0 - 36%. The savings of 5% is too low for her age group. She should be within the 10% - 18% range.)
C8: Lanie is a single mom who has 3 children, ages 1, 5 and 9. While she is struggling a bit, she would like to pay for half of their education at a public college. The annual cost of education is currently $20,000 and has been increasing at 6% and is expected to continue. Her portfolio that was established for education has $25,000 in it and earns an average rate of return of 8%. If she would like to fund half of four years of college for each of the children, how much must she save each year at the end of the year, for the next nine years (round to the nearest $100)?
$10,700. (Step 1: Determine the education needs for the three children at age 18 for the 9 year old.PV = $10,000 (half of the $20,000 tuition)N = 9i = 6FV = $16,894.79PMT = $16,894.79N = 12 (4 years for each of the 3 children)i = ((1.08 ÷ 1.06) - 1) x 100FV = 0PV AD = $183,311.36Step 2: Determine how much Lanie must contribute each year.FV = $183,311.36N = 9i = 8PV = - $25,000PMT = -$10,677.53Alternative Explanation:N = 4i = ((1.08 ÷ 1.06) - 1) x 100PMTAD = $10,000PV@18 = $38,902.54For 9 year old 32,878.88For 5 year old 30,510.23For 1 year old 28,312.22Total $91,701.33N = 9i = 8.0PV = $91,701.33 - 25,000PMT = $10,677.53)
C7: In five years, Joe wants to buy a boat that costs $75,000 in today's dollars. He can earn 8% return on his investments and he expects the boat to increase in price by 3% each year. What will Joe's serial payment at the end of the second year be, if he wants to buy the boat in 5 years?
$14,441.67. (N = 5i = (1.08 ÷ 1.03) - 1 x 100 = 4.8544PV = 0PMT = ?FV = 75,0000<13,612.65> Deposit at the end of the first year: 13,612.65 x 1.03 = 14,021.03 Deposit at the end of the second year: 14,021.03 x 1.03 = 14,441.67)
C7: Donna plans to save for a vacation to Costa Rica in 18 months. She will be putting the money into a short-term investment account earning 4% annually. How much will Donna have to put away at the beginning of each month if the total package cost for the trip is $3,500?
$188.37. (RationaleBEGIN ModeN = 18i = 4/12 = 0.3333PV = 0PMT = ?FV = 3,500<188.3654>)
C8: What is the present value of all college education for 5 children ages 0, 1, 1, 3, and 5 if the cost of education is today's dollars is $17,000 per year, education inflation is 5%, and the parents expected portfolio rate of return is 8.5%? The children are expected to be in college 4years and they will each start at age 18.
$192,007.89.
C7: DRI Enterprises needs to have a lump-sum deposit of $200,000 for the purchase of a surety bond in 6 months. They wish to immediately deposit a sum of cash into a short-term account paying 4% per year, compounded on a monthly basis. How much will they need to deposit into this account to have enough to purchase the bond?
$196,046.25. (RationaleN = 6i = 4/12 = 0.3333PV = ?PMT = 0FV = 200,000<196,046.2549>)
C7: Claire just won the lottery and has been told that she can either accept annual payments of $173,695 beginning now per year for the next 20 years or she can receive a lump-sum settlement. Claire figures she could invest the money at 6.34% (the same rate as the annuity). What would the amount of the lump-sum settlement be?
$2,061,320.61. (RationaleBEGIN ModeN = 20i = 6.34PV = ?PMT = 173,695FV = 0<2,061,320.6075>)
C7:With interest rates at 4.875% for a 30-year fixed mortgage, Dan, age 48, plans to buy a house for $825,000. He wants to put half of the purchase price down. What will his monthly mortgage payment be for principal and interest?
$2,182.98. (RationaleN = 30 x 12 = 360i = 4.875/12 = 0.4063PV = 825,000 x .50 = 412,500PMT = ?FV = 0<2,182.9839>)
C7: Danny buys a house for $500,000, putting 20% down. His loan is for 30 years at 6% and he includes closing costs of 3% into his mortgage. How much is his monthly payment (rounded to whole dollars)?
$2,470. (N = 30 x 12 = 360i= 6 / 12 = 0.5PV = 500,000 x 0.80 x 1.03 = 412,000PMT = ?FV = 0Key: Add 3% closing cost to the amount borrowed <2,470.1482>)
C8: Eddie Oliveri will be starting his freshman year of college this fall. The cost of attendance at the school he would like to attend is $37,000. The expected family contribution, as calculated from Eddie's FAFSA information, is $12,000. Eddie will receive a merit scholarship of $3,000 and expects to participate in a work-study program earning $5,000. What is the amount of Eddie's financial need as calculated in the federal financial aid formula?
$25,000. (Financial need is the difference between the cost of attendance and the expected family contribution.)
C8: Amita has 4 children ages 1, 3, 5, and 7. The current cost of college is $25,000. The children will begin college at age 18 and be in college for 4 years. Education inflation is expected to be 6% and the parents portfolio rate of return is 8%. How much does Amita have to save annually at year end through the education of the youngest child to pay all college costs?
$29,921.11. (N = 4i = [(1.08 ÷ 1.06) - 1] x 100PMT AD = $25,000PV@18 = $97,256.35694)
C8: Kim and Nick are planning to save for their daughter Chloe's college education. Chloe was born today and will attend college for 4 years, starting at age 18. Tuition currently costs $15,000 per year and tuition inflation is expected to be 6%. They believe they can earn 9% on their investments. How much must Kim and Nick save at the end of each year, if they want to make their last savings payment at the beginning of Chloe's first year of college?
$3,978.53. (0 [CFj]0 [CFj]17 [ORANGE][Nj]15,000 [+/-] [CFj]4 [ORANGE][Nj]1.09 ÷ 1.06 - 1 x 100 = [I/YR][ORANGE][NPV]Answer: 34,834.55 18 [N]9 [I/YR]34,834.55 [PV]0 [FV][PMT]Answer: <3,978.53>)
C7: Steve and his wife Christine recently opened an investment account with the intention of saving enough to purchase a house. Their goal is to have $45,000 for a down payment 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 goal?
$30,626.24. (N = 5i = 8PV= ?PMT = 0FV = 45,000<30,626.2439>)
C8: George has been in academia his entire career and wholeheartedly believes that education is the key to success. He has two daughters, Cindy and Susie. Cindy is a lingerie and swimsuit model who also believes in education, as well as fashion. Cindy has two children, Red and Mauve, who are ages 4 and 2 today. She is also headed to the hospital at this very moment to deliver her third child, who will be named Olive. Susie is an engineer, who used to play rugby in college and also believes in education. Her children, Copper and Mercury, are ages 3 and 5 today, respectively. George believes that with $100,000, a student should be able to obtain a great education, even if it is not the exact amount necessary to fund all of a student's time in college. George would to provide each of his grandchildren with the ability to have $100,000 of purchasing power when they turn 18. Education costs are approximately $30,000 per year at private schools and about $15,000 at public schools. Education costs have been increasing at a consistent rate of 7% per year and are expected to continue, while inflation has been at a steady 3% per year. How much should he set aside today to fund his goal for his grandchildren if he can earn a rate of return of 9%?
$377,520. (CFO- 0 Nj-13 CFj- 100,000 Nj-4 CFj- 0 CFj- 100,000 i 1.86916% NPV 377520
C7: Mark and Sonya would like to have the opportunity to buy a home in the next five years. They currently have $15,000 saved toward this goal in an investment account paying 7% annual interest, compounded on a monthly basis. In addition to this, Mark and Sonya add an additional $250 every month at the end of the month. Given this information, what amount can you tell Sonya and Mark that they will have for a down payment when they are ready to purchase their home?
$39,162.60. (N = 5 x 12 = 60i = 7 /12 = 0.5833PV = <15,000>PMT = <250>FV = ?39,162.6043)
C7: Frank and Stephanie have an 18 year old son who is going to college this year, for four years. The tuition is $15,000 per year and is expected to increase at 4% per year. They believe they can earn 6% per year on their investment, what lump-sum amount must they deposit today, to pay for their son's education?
$58,323.15. (BEGIN modeN = 4i = (1.06 ÷ 1.04) - 1 x 100 = 1.9231PV = ?PMT = 15,000FV = 0<58,323.15>)
C7: Jordan invested $12,500 to help her friend Dylan start his own cooking school five years ago. The business proved to be successful far beyond Dylan's expectations. Today he is returning a check to Jordan and has told her that as best as he could figure, she was receiving the equivalent of about 38% per year for her initial investment. What is the amount of the check Dylan has for Jordan today?
$62,561.25. (N=5i= 38PV = <12,500>PMT = 0 FV = ? 62,561.2540)
C7: Colleen's grandfather set up a savings account for her with a $25,000 gift when she was first born. The account accumulated interest annually at a rate of 6% per year and no other deposits were made to the account. Colleen is 21 years old today. To date, how much has accumulated in Colleen's account?
$84,989.09. (RationaleN = 21 i = 6 PV = <25,000> PMT = 0 FV = ? 84,989.0900)
C1: Steve Stein, a local CFP® practitioner, recently met with one of his new clients, Merrell.During the course of the meeting Steve did the following things: 1. Steve did not meet with Merrell until 10 minutes after the scheduled start time. 2. In order to establish Merrell's confidence in him, Steve told Merrell the names of several well known clients that currently do business with him. 3. Steve asked Merrell several questions regarding Merrell's family situation, hobbies, and activities.Which of these actions would be considered inappropriate?
1 and 2
C2: Which of the following are consistent with the Humanistic Paradigm?1. The majority of Humanistic theories view clients as experts on themselves.2. The alliance between the counselor and client is extremely important for humanistic counselors and is the basis of the treatment or plan of action.3. There needs to be a professional distance between the client and adviser where the adviser should stay close to discussing numbers and data with the client.
1 and 2.
C2: Which of the following are true about "why" questions?1. While the "why" questions are tempting and may help understand the client's motives, the "why" question may be ill-advised because it could have limited benefit for the client.2. A "why" question could place the client in a position of having to justify what was done, and that could put the client in a defensive posture.3. "Why" questions are always the best questions to ask.
1 and 2.
C2:Which of the following statements are true?1. There has been a movement in recent times for the financial industry to be more in touch with psychology and sociology due to their effect and persuasiveness in financial matters.2. There has been a movement in recent times for the financial industry to focus on asset prices and ignore psychology and sociology issues.3. Behavioral Finance has nothing to do with issues concerning psychology and sociology.
1 only.
C3: Adriana is an analyst at High Tech Hedge (HTH) where she earns $150,000 base salary with a bonus of $50,000. HTH sponsors a profit-sharing plan with a 401(k) feature and provides for a dollar-for-dollar match up to 3% of compensation. Her account had $10,000 of capital gains this year and dividends of $5,000. She defers $15,000 into the 401(k) plan. The employer made no additional contribution to the profit sharing plan. What is her savings rate this year?
10.5%. The savings rate equals the savings to her 401(k) plan and the employer match, divided by her compensation. Calculation = ($15,000 + $6,000) ÷ $200,000.The savings rate includes the match, which equals $6,000. The match is dollar-for-dollar up to 3% of compensation (3% of $200,000 = $6,000). The total saved is therefore, $21,000, which is then divided by the compensation of $200,000. This calculation equals 10.5%.
C3: Janice earns $85,000 working as an administrative assistant in a public company based in New York. The company provides a matching contribution in the 401(k) plan of 50% of her contribution, up to a maximum matching contribution of 4% of compensation. Her 401(k) plan account had $20,000 in it at the beginning of the year. She contributed $5,000 to the plan this year and the employer made the matching contribution before year end. The ending balance of the account is $30,000. What is her return on her investments this year for the 401(k) account?
12.5%. The ROI equals the net increase in the account attributable to earnings divided by the beginning balance. Reduce the ending balance of $30,000 by her contribution and the match, which totals to $7,500. Take the difference of $2,500 divided by $20,000 to yield 12.5%. The match is 50%, up to a limit of 4% of compensation (4% x $85,000 = $3,400). Since 50% of her contribution (50% x $5,000 = $2,500) is less than the maximum of $3,400, the company match will be $2,500. The total saved is $5,000 + $2,500 = $7,500. This amount is subtracted from the ending balance to determine the net increase attributable to the investment earnings.
C7: David purchased stock 15 years ago for $325.75. He sold the stock today for $2,500. Given this information, what is the average annual compound rate of return that David realized on this stock?
14.55%. (N = 15i = ?PV = <325.75>PMT = 0FV = 2,50014.5523)
C7: Alberto saved enough tip money from working at the casino to place $125,500 in an investment account 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. Approximately, how many months will Alberto have this income coming to him?
162. (BEGIN ModeN = ?i = 9.25 / 12 = 0.7708 PV = <125,500> PMT = 1,350FV = 0161.7058)
C8: Calvin and Holly Burns want to plan for the education of their son, age 6. They expect to send him to college when he is 18 and may want to send him to a private high school. Their AGI is $120,000 now, and they expect it to increase by 5% annually. They want to invest so that they avoid taxes on the funds. What techniques will provide tax-free funds to finance both private school and college for the Burns' son? 1. Series EE bonds.2. Sec. 529 plan. 3. Municipal bonds in a UTMA account.4. Coverdell ESA.
2,3 and 4 Up to $10,000 can be distributed tax-free annually from a 529 plan for tuition at elementary and secondary private and public schools, and distributions from 529 plans are tax-free for qualified higher education expenses at postsecondary schools. The Coverdell ESA will allow for payment of secondary and postsecondary qualified education expenses, and the withdrawals are excluded from income. The Series EE bonds are not likely to be tax-free for post-secondary expenses because the Burns family will have an AGI over the phaseout level, and the bonds cannot be redeemed tax-free for secondary school tuition. Municipal bonds provide tax-free interest income, regardless of what the interest is used for, so they could be used for both private high school and for postsecondary education. UTMA accounts can be used for any expenses that benefit the minor beneficiary.)
C8: Which of the following loans will likely be available to pay for college expenses for the children of parents with an adverse credit history and high debt-to-income ratio? 1. Parent PLUS loan.2. HELOC.3. Life insurance cash value loan.4. 401(k) loan.
3 and 4. (Parent PLUS loans require that there is no adverse credit history, so the parents will not qualify There are no credit checks or debt-to-income ratio limitations on loans from the cash value of life insurance or on loans from a 401(k), so the parents will qualify for these loans in spite of their adverse credit history and high debt-to-income ratio. The HELOC would require a good credit history and that debt-to-income ratios be within specified levels, so a parent with an adverse credit history and high debt-to-income ratio will not be likely to qualify.)
C7: Cindy won the California lottery. She can take a single lump-sum payout of $12.5 million dollars or receive $825,000 per year for the next 25 years. What rate of return would Cindy need to break even if she took the lump-sum amount instead of the annuity?
4.29%. (N = 25i = ?PV = -12,500,000 PMT = 825,000FV = 04.2916
CV: Liam bought a piece of equipment for $10,000. He paid $3,000 for upgrades during year 1 and the equipment generates $2,000 in cash flow for year 1. In year 2 the equipment generated $3,000 and in year 3 it generated $4,000, but Liam sells it for $6,000 and pays a $500 commission. What is his IRR?
4.9%. (CF0 = <10,000>CF1 = <3,000> + 2,000 = <1,000> CF2 = 3,000CF3 = 4,000 + 6,000 - 500 = 9,500 IRR = ?= 4.9%)
C3: Candice earns $85,000 working as an administrative assistant in a public company based in New York. The company provides a matching contribution in the 401(k) plan of 50% of her contribution, up to a maximum matching contribution of 4% of compensation. Her 401(k) plan account had $20,000 in it at the beginning of the year. She contributed $5,000 to the plan this year and the employer made the matching contribution before year-end. The ending balance of the account is $30,000. What is her savings rate this year?
8.8% The savings rate equals the savings to her 401(k) plan and the employer match, divided by her compensation. Calculation = ($5,000 + $2,500)/ $85,000 = 8.8%The match is 50%, up to a limit of 4% of compensation (4% x $85,000 = $3,400). Since 50% of her contribution (50% x $5,000 = $2,500) is less than the maximum of $3,400, the company match will be $2,500. The total saved is $5,000 + $2,500 = $7,500, which is then divided by her compensation of $85,000 to determine the savings rate of 8.8%.
C8: What is one of the primary differences between a Coverdell ESA and a 529 Savings Plan?
A Coverdell has contribution limits far below those of 529 Savings Plans. (A 529 Savings Plan does not have a phase-out limit. Only a 529 Savings Plan is permitted to use front-loading, in which contribution may be prorated over 5 years for gift tax purposes. Coverdell contributions are limited to $2,000 per year per beneficiary while 529 Savings Plan contributions limits are much higher (the limit varies by state plan but is typically $250,000 - $500,000).)
C8: Which of the following statements concerning educational tax credits and savings opportunities is correct?
A parent who claims a child as a dependent is entitled to take the AOTC credit for the educational expenses of the child. (• The Lifetime Learning Credit is equal to 10% of qualified educational expenses up to a certain limit - 20% up to $10,000 in expenses.• The AOTC is available for the first 3 years of postsecondary education - first four years only.• A parent who claims a child as a dependent is entitled to take the AOTC for the educational expenses of the child.• The contribution limit for Coverdell Education Savings Accounts is applied per year per donor - per student, not per donor.)
C2: Which schools of thought for counseling could an adviser combine?
All 3 schools of thought may be combined.
C2: Which of the following are components of "passive listening?"1. Listening in a normal social setting, such as a sermon.2. Communication rests on one speaker.3. The listener screens out some information.4. The listener is thinking about what to say in response which hampers listening.
All of the above.
C2: Which of the following are important in nonverbal communication and behavior?1. Body positioning.2. Body movement.3. Voice tone.4. Voice pitch.
All of the above.
C2: Which of the following are theories or equations used in traditional finance?1. Mean-Variance Theory.2. Modern Portfolio Theory.3. The Capital Asset Pricing Model.
All of the above.
C2: Which of the following is considered to be a counseling paradigm or school of thought?
All of the above.
C2: Which of the following is/are basic premises in Behavioral Finance?1. Investors are normal.2. Markets are inefficient.3. The Behavioral Portfolio Theory governs.
All of the above.
C5: Which of the following is most likely to be an insurable risk?
An automobile accident due to negligence.
C4: Which of the following would not generally be considered a short-term liability?
An automobile loan.
C4: Craig's financial planner is preparing his balance sheet. Which of the following would be considered an "investment asset?"
An education fund.
C5: You recently met with your client, Tripp, to discuss his insurance policies. Tripp was reading a book on contracts and wanted to know how his insurance contract related to the material he was reading and to his circumstances. During your conversation, Tripp made several statements to clarify that he understood insurance. Which of the following statements would you have told him was incorrect?
An insurance contract is unilateral, where both parties agree to a legally enforceable promise.
C2: Which of the following investors would apply in the realm of Behavioral Finance?
An investor who at times is subject to emotion or cognitive biases.
C3: Which of the following choices are false as to open or closed questions?
An open question starts with the phrase "Isn't it true that ..."
C1: After meeting with your new client, Sid, you prepared his current financial statements. Which part of the financial planning process were you engaged in?
Analyze the client's current course of action and potential alternative courses of action.
C1: Lisa Cooper recently came to your office for her second appointment after receiving your engagement letter. During the meeting you collect several documents from her including her prior year tax returns, estate planning documents, and investment statements and history. You also worked with her on identifying her goals and objectives. Which of the following is the next step in the financial planning process?
Analyze the client's current course of action and potential alternative courses of action.
C5: If a risk has a high frequency of occurrence and a high severity, you should:
Avoid the risk.
C2: Which of the following is true regarding Behavioral Finance?
Behavioral Finance does not abandon Traditional Finance, though some key assumptions are changed.
C8: Joe is 45 years old and has always managed his credit well, allowing him to maintain a high credit score and receive the best terms on loans. Joe's son Frank is 25 years old and recently married Brenda. Frank would like to go to graduate school and will need to borrow money via a private student loan to do so. Unfortunately, Frank and Brenda both have a few negative items on their credit reports and cannot qualify for any loans at a rate that they can afford. Frank has asked Joe to cosign on a loan. Which of the following statements is(are) true if Joe agrees to cosign the loan?1. If Frank and Brenda cannot make the payments, Joe will be responsible for making them or his credit score could be negatively impacted.2. If Joe applies for a loan a few years later, the remaining balance of the loan will show up as a debt that he is responsible for on his credit report.
Both 1 and 2.
C1: You are a relatively new financial planner. You have been working for an investment firm in the United States and have decided that you would like to add more credibility to your practice. Which of the following professional credentials would provide you with the most credibility since it is the oldest and best known?
CFP®.
C3: Robin met with you recently to make some changes to her insurance needs. You have made several recommendations. Which of these recommendations will have a positive cash flow impact from an insurance perspective?
Cancel an insurance policy. (Canceling an insurance policy will result in $0 premiums due, which positively impacts cash flow. Changing the beneficiary of a life insurance policy will not impact the premium or cash flow. Increasing the amount of coverage will increase the premium and negatively impact the cash flow. Lowering deductibles will increase premium payments thus having a negative impact on cash flow.)
C4: Craig's financial planner is preparing his balance sheet. Which of the following would not generally be considered "cash and cash equivalents?" A)Cash value in life insurance. B)Money market account. C)Certificate of deposit with a 6 month maturity. D)Checking account.
Cash value in life insurance. (The cash value in life insurance is generally considered an investment asset except when the client intends to withdraw it within the year. The other three are typical "cash and cash equivalents.")
C5: Jim's car was totaled in a wreck. He failed to yield to oncoming traffic and Jim was found to be at fault. The driver of the car he hit did not have insurance. Jim's own car insurance policy reimbursed him for the property damage to his own vehicle. What type of coverage would pay for this?
Collision coverage.
C7: Kelly has asked her accountant, Darla, to determine whether her company, Gaggin Industries, a leader in chain manufacturing, should purchase a new machine for $155,000 that can be sold at the end of 5 years for $125,000 and during that time will generate cash flows as follows:(Year 1) + 4,000;(Year 2) +7,000 and(Years 3 - 5) + $15,000.She told Darla to determine her NPV with her cost of capital at 11.5%. With her NPV calculated, what will Darla tell her?
Do not purchase the machine because NPV is negative. (CF0 = <155,000>CF1 = 4,000CF2 = 7,000CF3 - 4 = 15,000CF5 = 15,000 + 125,000 = 140,000i = 11.5NPV = ?<44,019.1742> Therefore, don't purchase because NPV is negative.)
C3: Ronnie visited your office today. He is 55 years of age. He is divorced and has two children. One child recently graduated from college and the other child is just entering into high school. Ronnie earns $350,000 a year as the operator of a very specific type of medical equipment. There are only two of these particular machines in existence. He has provided you the following financial information.• Cash and Cash Equivalents - $100,000• Annual Non-Discretionary Expenses - $300,000Which of the following is true?
Given all the facts and circumstances, Ronnie probably does not have an adequate emergency fund. Rationale: Ronnie probably does not have an adequate emergency fund. His emergency fund is 4 months ($100,000 ÷ ($300,000 ÷ 12)). This is within the normal range of 3 - 6 months, however, since he is older and has a very specialized job, 4 months is not likely to be an adequate amount of time for him to get another job paying the amount of money he is currently making. A slightly longer emergency fund ratio would be better for this particular client. Disability insurance is relevant in determining whether the emergency fund ratio is appropriate because some job losses are a result of disability The elimination period incorporated in the disability policy should be considered.
C3: CJ bought the following assets this year. Which of these purchases would be considered "bad debt?"
He purchased a slightly used car from a pre-owned dealer. The car has an estimated useful life of 3 years. He put down 5% and financed the balance over 72 months. (The car debt is not good because the term of the debt exceeds the useful life. The credit card purchase is okay because he paid it off within the month. The home loan is fine because the residence presumably has a greater than 15 year estimated useful life. The student loan debt is okay because this education should provide increased future income.)
C1: Your client, Jed, engaged you to help him with his financial situation. During the course of your meetings you sold Jed a $1,000,000 life insurance policy. Which part of the financial planning process were you engaged in?
Implementing the financial planning recommendations.
C4: Your client, Tom, asked you to prepare his financial statements. He believes that his wife is the root of all of their financial problems because of her spending habits. His wife, on the other hand, believes that most of their money goes to pay routine expenses like, house, auto, etc. Which financial statement will help them resolve this disagreement?
Income Statement.
C5: Which of the following would not be considered a personal risk?
Injuring a passenger in your vehicle during an auto accident that was your fault.
C2: Which of the following are NOT components of "active listening?"
Interruptions or disruptions, such as texting and bathroom breaks, are common.
C5: Jennifer had a very bad year. She wrecked her car in January when she ran a red light (because she could not see properly having left her contacts at home) and crashed into another car completely destroying both cars. The insurance company was very nice to her and she purchased a new car with the insurance proceeds. Jennifer decided that since she had insurance, it really did not matter if she took proper care of her new car because she could always get a new one. Jennifer got in the habit of leaving her new car unlocked and it was stolen. After Jennifer bought another car she decided that she really liked the insurance adjuster and wanted to see him again, so one day she purposefully set her car on fire. In her carelessness, she also caught her hand on fire. Jennifer was depressed over her circumstances and decided she didn't want to go back to work. She filed a falsified disability claim for the loss of use of her hand (even though she could still use her hand). Which of the following statements is true?
Leaving the car unlocked is a morale hazard. (Driving with poor eyesight is a physical hazard. Leaving the car unlocked is a morale hazard. Burning the car on purpose and filing a false disability claim are both moral hazards.)
C4: Your client, Meg, asked you several questions about her balance sheet. She doesn't understand how the assets, liabilities and net worth are related. Which of the following statements is true?
Liabilities = Assets - Net Worth.
C3: Rachel is 30 years old and single. She is healthy, has no children or pets. Rachel works as a human resources coordinator and earns approximately $40,000 per year. Due to her outstanding student loans, she has a fairly low net worth. She rents an apartment but does own her car outright. All of the following are likely insurance coverage needs, except?
Life Insurance. (Because Rachel is single with no dependents she is not likely to need life insurance. However, health, disability, and liability insurances are definitely needed. The health insurance is needed to cover current health risks. The disability insurance is needed to cover any loss of income from disability. She also needs liability insurance to protect future income from any liability claims.)
C5: Erin purchased a life insurance policy on her own life. Her husband Mike is the beneficiary of the policy. Which of the following is not a necessary legal element of the contract?
Listed beneficiary. (The elements of a valid contract are (1) offer and acceptance, (2) legal competency of all parties, (3) consideration, and (4) lawful purpose. A listed beneficiary is not a requirement of the contract.)
C2: Which of the following is NOT a premise in Traditional Finance?
Markets are Inefficient.
C4: Which of the following statements concerning the valuation of assets on the balance sheet is correct?
Money market accounts are unlikely to lose value over time. (Money market accounts are considered "cash equivalents" and are unlikely to lose value over time. A publicly traded company is easier to value than a privately-held small business. Assets should be valued on the balance sheet using the current fair market value. The value of personal use assets is generally determined by client estimation.)
C1: Dustin Towns is a well-known financial planner in your area. His clients rave about how great he is and after meeting him you understand why. While describing him to your friend Jim, Jim wanted to know what was so great about financial planners in general. You responded with the following statement "One of the most important qualities a professional financial planner brings to the client/planner relationship is: ________________."
Objectivity.
C1: Which of the following stated goals of a client is most workable for financial planning purposes?
Of most importance, to purchase a vacation home within 5 years at a cost of about $100,000.
C4: A financial planner is currently preparing a client's cash flow statement. Which of the following would the planner classify as a financing activity?
Paying a credit card debt.
C8: The following type of financial aid is awarded to students with a low EFC, and funds are guaranteed to be available if a student qualifies:
Pell Grant.
C3: Which of the following is true?
Performance ratios determine the adequacy of returns on investments given the risks taken.
C2: Which of the following is NOT true in communicating with a client?
Posture means nothing.
C5: During your recent meeting with Ron, a new client, you discussed the concept of risk. You defined several terms for Ron. Which of the following terms is defined as: the possibility of loss, but no possibility of gain?
Pure Risk. (Perils are the proximate or actual cause of a loss that upon occurrence could lead to financial hardship. Risk transfer is the transferring or shifting of risk of loss through insurance or warranty. Open-perils are called "all-risk" policies, and cover all risks except those which the policy specifically identifies as excluded.)
C3: David, 33 years of age, and Kristina, 34 years of age, are married with no children. They anticipate having children within the next five years. David and Kristina both have a graduate degree and student loans. They both have good jobs and earn about $110,000 together. They have mortgage debt of $190,000 on their home that is valued at $210,000. They have one car that they share that is not yet paid for and they anticipate buying a second car in the next year. They have no credit card debt. Which of the following is a likely current goal of the couple?
Retirement Funding.
C4: Which of the following statements concerning income and expenses listed on the Income Statement is correct?
Social Security taxes withheld is an example of a fixed expense.
C3: You have been working with your client, Brenda, for 3 months now. You developed a mission statement, goals, and objectives with the client. You are now constructing a plan that is led by the client's mission statement. Which approach to financial planning are you utilizing?
Strategic Approach. (The strategic approach is led by the client's mission statement. The life cycle approach utilizes quick and simple data collection in a nonthreatening way permitting the financial planner to quickly focus on expected needs. The metrics approach utilizes qualitative benchmarks to determine where a client should be. The three panel approach compares the client's actual financial situation with benchmark criteria.)
C4: Which of the following property ownership regimes has a right of survivorship feature?
Tenancy by the Entirety.
C4: Nathan and Evan (two brothers) are joint property owners. Nathan owns 60% and Evan owns 40%. How is this property owned?
Tenants in Common. (The property cannot be owned as Sole Ownership because there is more than one owner. It cannot be Joint Tenancy because the brothers have unequal ownership interests. It cannot be Tenancy by the Entirety because the joint owners are not married to each other. Therefore, the brothers own the property as Tenants in Common.)
C4: A client, Marie, age 35, came into a financial planner's office today. She provides the planner with the following information for the upcoming year:• Income - $100,000• Principal and Interest payments on home mortgage - $14,000• Homeowners insurance - $1,000• Property taxes - $5,000• Living Expenses - $40,000• Credit Card Debt Payments - $12,000• Savings - $5,000• Student Loan Payments - $5,000• Car Payment - $6,000When considering the targeted benchmarks, which of the following statements is the planner most likely to make during the next meeting?
The basic housing ratio is within the normal range, but the broad housing ratio is not. (The basic ratio is at 20% which is within the normal range of 0 - 28%. PITI / gross pay = [($14,000 + $1,000 + $5,000) / $100,000]. The broad housing and debt percentage is 43% [(PITI of $20,000 + credit card debt of $12,000 + student loan payments of $5,000 and car payment of $6,000) / $100,000]) which is above the normal range of 0 - 36%.)
C2: A financial planner has presented a financial plan to a client and recommended some changes to the client's investments to increase returns. The planner has asked the client for feedback, and the client has expressed some hesitation about the proposed investments in equity portfolios. The client is risk averse and the allocation reflected the client's risk tolerance, but the client is uncertain about the added risk of some new investments. The planner proceeded to spend some time explaining the principles of modern portfolio theory and how the changes recommended for the client would help to optimize his portfolio. The client seems to understand but is not yet ready to accept the plan. Which of the following is most likely the behavioral finance issue that is causing the client to resist making the recommended changes?
The client is reluctant to leave his comfort zone.
C8: If grandparents contributed $150,000 to a 529 Savings Plan for their grandchild, elected to split the gift and treat it ratably over a 5-year period, and one of the grandparents died during the next year, which of the following statements is correct?
The gross estate of the deceased grandparent would have to include $45,000 of the contributions to the 529 plan. Rationale
Natalie and Brian visited your office today. They are both in their early 30s and have two children with one on the way. During your meeting they provide you with the following financial information:• Gross Income per Year - $150,000• Housing Costs per Year (P & I and T & I) - $24,000• Other Debt Payments per Year - $50,000• Total Assets - $300,000• Total Debt - $200,000Which of the following is true?
The housing ratio 1 (basic) is within the normal range. (The housing ratio 1 (basic) is 16% ($24,000 ÷ $150,000) which is within the normal range of 0 - 28%. The housing ratio 2 (broad) is 49% [($24,000 + $50,000) ÷ $150,000] which is above the normal range of 0 - 36%. The debt to total assets ratio is 67% ($200,000 ÷ $300,000). The net worth to total assets ratio is 33% [($300,000 - $200,000) ÷ $300,000]. Remember that net worth is equal to assets minus liabilities.)
C5: Joe wants to purchase a life insurance policy on his own life. He is interested in learning about the various approaches to determine the amount needed. Which of the following is not true regarding the three most common approaches?
The human life value method estimates the present value of income generated over a person's work life expectancy, after adjusting for the expected consumption of the survivors.
C1: Which of the following items of information is least likely to be obtained from your client during the data gathering portion of the client meeting?
The income tax bracket of your client's adult children.
C8: Which of the following assets will be countable in the financial aid formula for a college student?
The investments in a 529 Savings Plan owned by the student's parents. (The investments in a 529 Savings Plan owned by a third party such as the child's grandparents will not be countable, but the investments in a 529 Savings Plan owned by the student or parent will be countable as parent assets. The cash value of life insurance policies and IRA account balances owned by the student's parents are not countable assets.)
C5:Which of the following is true regarding the financial needs method used to determine life insurance needs?
The readjustment period typically lasts for one to two years following the death of the breadwinner. (Most clients do not want their dependents suffering a decrease in their standard of living. Final expenses and debts are a key feature of this method because they may be substantial and are often due close to death. The so-called blackout period is the period of time between when Social Security survivor benefits stop and retirement benefits begin.)
C3: You currently manage Cody's investment portfolio. He provided you with the following information for the beginning and the end of the year:• Investment Balance (beginning of the year) - $105,000• Investment Balance (end of the year) - $115,000• IRA Balance (beginning of the year) - $75,000• IRA Balance (end of the year) - $82,000• Net Worth (beginning of the year) - $1,000,000• Net Worth (end of the year) - $970,000• Annual Savings to IRA - $5,000Which of the following statements is correct?
The return on investments ratio is within the normal range. Rationale: The return on investments ratio is 9.5% (($115,000 - ($105,000 + $0)) / $105,000). This is within the normal range of 8 - 10%. The return on the IRA ratio is 2.67% (($82,000 - ($75,000 + $5,000)) ÷ $75,000). This is within the normal range of 2 - 4%. The return on net worth ratio is -3.5% (($970,000 - ($1,000,000 + $5,000)) ÷ $1,000,000). This is negative and therefore not within the normal range.
C5: You recently met with your client, Don, age 40. Don is widowed and has one dependent child. During your meeting with him you discussed the concept of risk management. Which of the following statements regarding the ways to manage risk is incorrect?
The selling of Don's Jet Ski is an example of risk reduction. (The selling of the Jet Ski is an example of risk avoidance (risk avoidance is the avoidance of an activity so that a financial loss cannot be incurred). Risk reduction is the implementation of activities that will result in the reduction of the frequency and / or severity of the loss. Not purchasing life insurance is an example of risk retention (the state of being exposed to a risk and personally retaining the potential for the loss). Risk transfer is the transferring or shifting of the risk of loss through insurance or warranty.)
C8: Bob Johnson established a Section 529 Savings Plan for his son Robert several years ago. It is now time to pay Robert's first-year college costs. The current value of the fund is $80,000. If Bob withdraws $20,000 to pay qualified tuition expenses, how will the distribution be taxed?
There will be no federal taxes. (Withdrawals from Section 529 plans to pay qualified higher education costs are income tax-free.)
C3: Paul and Lucy Martin are married and both are 65 years of age. Paul is retired from the military and receives a military pension as well as disability benefits from an injury he sustained during the Vietnam War. Lucy is a retired nurse. Lucy is fairly healthy, although she is borderline diabetic. Paul is diabetic and had a triple bypass several years ago. He also has extensive hearing loss in one ear that he sustained during his military service. Both have a family history of Alzheimer's disease. Their home is paid for and they just purchased a new car with financing. They have three self sufficient adult children and two grandchildren. The Martins have a life insurance policy on each of their adult children they purchased when the children were young with a death benefit of $10,000. All three policies have a cash value of $3,000 each. They also have policies on each other with a death benefit of $100,000. The Martins live comfortably with their pensions but do not have a lavish lifestyle or high net worth. Which of the following is their most important need/goal?
They should investigate long-term care insurance. (The most likely need/goal for Paul and Lucy is a long-term care insurance policy. In this case, both have some medical issues that may require long-term care. The policy may be cost prohibitive, so costs should be investigated. There is no indication that the Martins have a substantial net worth therefore a gifting program is not necessary. There is no indication that they need additional life insurance. They do not indicate that they have an income stream that needs to be replaced and there does not appear to be an estate tax consequence that will require insurance to provide liquidity. A disability policy is not necessary because Paul does not have an income stream that needs to be protected (plus, he is unlikely to qualify anyway).)
C1: At what point in time should the financial planner and the client identify their specific responsibilities?
When establishing the relationship.
C1: Roy Al Pain has been a client of yours for several years. During that time, Roy has been rude to both you and your staff on numerous occasions. He has used profanities in front of your staff and other clients, thrown things, and screamed at your staff. You have tired of working with Roy and want to terminate your relationship with him. Which of the following is true?
You should consult your engagement letter to determine your rights to terminate the relationship.
C5: Zach and Laura recently purchased a new home. They came to your office to ask several questions about their homeowner's policy. Which of the following is true regarding homeowners insurance?
Zach and Laura should probably have an open perils and replacement value for all property covered under the homeowners policy. (Zach and Laura should probably have open perils and replacement value for all property covered under the homeowners policy because it provides the best coverage. Most policies do not cover all possible losses. For example, they often exclude losses due to earth movement, mold, rising water, sewer backup, war, nuclear accidents, neglect, dogs and intentional acts. Most policies require additional coverage for certain valuable collections or items, like guns, wine, coins, stamps, cash and jewelry. Broad peril coverage means the insurance company covers many perils, however, they are specific in nature.)
