TVM Finance Test 3

APR =

npy *[(1 + EAR)1/npy - 1]

You think you will need $10,000 per month to live on in retirement. You hope to live 20 years in retirement. If you can earn 5% annually on your investments, how much do you have to accumulate in order to retire?

$1,515,253.13

A company is trying to set the quarterly $ dividend for a preferred stock it wants to sell. If they want to price the stock at $50 and similar stocks have a dividend yield of 9%, what must the quarterly dividend be?

$1.125

You plan to invest $2400 each year for 5 years into a mutual fund. You believe you can earn 8% per year on your investments. How much will you have in the fund in 30 years?

$104,139.48

You borrow $300,000 at 5% annually, payable monthly. It is a simple interest loan. What is your monthly interest payment?

$1250

You borrow $250,000 from the bank to buy a house. The terms are 4.5% APR, payable monthly for 30 years. What will your payment be?

$1266.71

Your parents set up a trust for you. It will pay $3000 per month for 8 years (they figure it will take you that long to get through undergrad and graduate schools) beginning in 4 years. Then, it will pay you a lump sum of $50,000 to get started with your adult life. If you could sell the trust today, what would a person using a discount rate of 10% annually be willing to pay you for it?

$147,879.88

You and your spouse each make $50,000 per year. You will pay 7% in social security taxes, 25% in Federal Income taxes and 5% in State income taxes. The bank will loan you an amount such that 28% of your after tax monthly income is the amount of the payment. The loan terms are a 4.5% annual interest rate, payable monthly for 30 years. What is the amount of your payment?

$1470

You want to buy a car. You can afford a payment of $300 per month. If you can borrow at 6% annually for 5 years, how much will the bank lend you to buy a car?

$15,517.67

You plan to invest $1000 today in the mutual fund. You will invest $2000 in one year. $3000 in two years and $4000 in 3 years. You hope to earn 7% per year on your investments. How much will be in the fund in 10 years?

$17,221.75

You are considering buying an office building. You project that operating income will be $150,000 in the 1st year, $225,000 in the 2nd year, $300,000 in the 3rd year and $350,000 in the 4th year. You plan to sell it for $3.0 mln at the end of the 4th year. If similar projects earn a rate of return of 14%, what should you pay today for the building?

$2,490,670

What if you only save $200 per month for 30 years at 6% annually?

$200,903

You borrow $250,000 from the bank to buy a house. The terms are 4.5% APR, payable monthly for 30 years. How much interest will you pay back to the bank?

$206,016

You have become a highly valued employee. Your company has offered you a perk called deferred compensation. If you stay with the company for 5 years they will pay you an extra $100,000 per year at the end of years 6 - 10. Using a discount rate of 7.5%, what is the value of the perk today?

$281,820

You are too conservative to take as much risk as the person in question one. So, you will only earn 6% per year on your investments. If you save $200 per month for 35 years, how much will you have at the end?

$284,942

You and your spouse each make $50,000 per year. You will pay 7% in social security taxes, 25% in Federal Income taxes and 5% in State income taxes. The bank will loan you an amount such that 28% of your after tax monthly income is the amount of the payment. The loan terms are a 4.5% annual interest rate, payable monthly for 30 years. What is the present value of the monthly payments?

$290,121

You plan to save $200 each month for retirement. You will invest pretty aggressively, so you think you can earn 8% annually. You don't want to start saving for 5 years, so you will only have 30 years' worth of saving and investing. How much will you have?

$298,071.89

3- You are contemplating what your life will be like if you flunk finance. Studies show that couples who fail this course earn a combined average income of $70,000 per year. If you cut expenses to the bone and live in a trailer and drive old cars, it will cost you $4000 per month to live. You won't be able to afford children or vacations. Assume you are currently 25, you want to retire at age 65, taxes will take 25% of your income and you will save the balance of your income each month after the expenses listed above. Now, assume you will live 20 years after retirement and that it will cost you $4000 per month. If you can earn 5% on your retirement money, how much money will you have to have by age 65 to fund your retirement? ANSWER: Once you find this amount, what rate of return will you have to earn on your monthly saving between age 25 and 65 to accumulate enough money for retirement?

$375

What if you only save $400 per month for 30 years at 6% annually?

$401,806

You borrow $250,000 from the bank to buy a house. The terms are 4.5% APR, payable monthly for 30 years. How much will you pay back to the bank in total?

$456,016

You plan to save $200 each month for retirement. You will invest pretty aggressively, so you think you can earn 8% annually. How much will you have in 35 years?

$458,776.50

You and your spouse each make $50,000 per year. You will pay 7% in social security taxes, 25% in Federal Income taxes and 5% in State income taxes. The bank will loan you an amount such that 28% of your after tax monthly income is the amount of the payment. The loan terms are a 4.5% annual interest rate, payable monthly for 30 years. What is your monthly after-tax income?

$5250

You are too conservative to take as much risk as the person in question one. So, you will only earn 6% per year on your investments. If you save $400 per month for 35 years, how much will you have at the end?

$569,884

A preferred stock pays a quarterly dividend of $1.00. The annual required rate of return for this security is 7%. What is a fair price to pay for this preferred stock?

$57.14

A preferred stock pays an annual dividend of $5.00. The required rate of return for this type of security is 8.5%. What is a fair price for this preferred stock?

$58.82

You plan to save $400 each month for retirement. You will invest pretty aggressively, so you think you can earn 8% annually. You don't want to start saving for 5 years, so you will only have 30 years' worth of saving and investing. How much will you have?

$596,143.78

3- You are contemplating what your life will be like if you flunk finance. Studies show that couples who fail this course earn a combined average income of $70,000 per year. If you cut expenses to the bone and live in a trailer and drive old cars, it will cost you $4000 per month to live. You won't be able to afford children or vacations. Assume you are currently 25, you want to retire at age 65, taxes will take 25% of your income and you will save the balance of your income each month after the expenses listed above. ANSWER: Now, assume you will live 20 years after retirement and that it will cost you $4000 per month. If you can earn 5% on your retirement money, how much money will you have to have by age 65 to fund your retirement?

$606,101

You are thinking about buying a business. You plan to sell it to your son and daughter. The business is expected to generate income of $100,000 per year. The kids are starting the 9th grade? They will finish college in 8 years. You expect to sell the business to them for $1.0 million when they graduate from college. Assuming you need to earn 20% annually on this investment, what should you pay today for this business?

$616,283

You plan to save $400 each month for retirement. You will invest pretty aggressively, so you think you can earn 8% annually. How much will you have in 35 years?

$917,553

You want to buy the car of your dreams. It will cost $75,000. Your trade-in is worth $15,000. The bank will loan you the money at 6% APR, payable monthly for 6 years. What will your payment be?

$994.37

What would you pay today for an annuity that will pay you $24,000 per year for 25 years. Your discount rate is 6%.

-$306,800.55

What would you pay today for an annuity that pays you $2000 per month for 25 years if the annual discount rate is 6%?

-$310,413.73

You and your spouse each make $50,000 per year. You will pay 7% in social security taxes, 25% in Federal Income taxes and 5% in State income taxes. The bank will loan you an amount such that 28% of your after tax monthly income is the amount of the payment. The loan terms are a 4.5% annual interest rate, payable monthly for 30 years. What is your monthly I/Y?

.375

If your interest rate is 8% annually, payable monthly, what will the period I/Y be?

.66667

A bank quotes an APR of 9% on a loan. What is the monthly rate on the loan?

.75%

Your parents have that $1.0 million. They need to take out $9000 per month for 20 years. What monthly rate of return must they earn in order to do this? Annual rate?

.75%m 9%a

A number preferred stock is selling for $60.00. It pays a quarterly dividend of $1.5. What is the required rate of return for this security?

10%

If an investment pays monthly and the term is 10 years, what will the N be?

120

You have calculated an effective annual rate on a loan to be 14%. What APR did the bank quote on this loan if it is compounded monthly?

13.75%

Your parents have accumulated $1.0 million. They need to take out $9000 per month to live in retirement. If they can earn 4% on their investments, how many months will their portfolio last? Years?

139m, 11.58y

You and your spouse each make $50,000 per year. You will pay 7% in social security taxes, 25% in Federal Income taxes and 5% in State income taxes. The bank will loan you an amount such that 28% of your after tax monthly income is the amount of the payment. The loan terms are a 4.5% annual interest rate, payable monthly for 30 years. What is the total N?

360

You and your spouse each make $50,000 per year. You will pay 7% in social security taxes, 25% in Federal Income taxes and 5% in State income taxes. The bank will loan you an amount such that 28% of your after tax monthly income is the amount of the payment. The loan terms are a 4.5% annual interest rate, payable monthly for 30 years. What is the total % paid in taxes?

37%

3- You are contemplating what your life will be like if you flunk finance. Studies show that couples who fail this course earn a combined average income of $70,000 per year. If you cut expenses to the bone and live in a trailer and drive old cars, it will cost you $4000 per month to live. You won't be able to afford children or vacations. Assume you are currently 25, you want to retire at age 65, taxes will take 25% of your income and you will save the balance of your income each month after the expenses listed above. Now, assume you will live 20 years after retirement and that it will cost you $4000 per month. If you can earn 5% on your retirement money, how much money will you have to have by age 65 to fund your retirement? Once you find this amount, what rate of return will you have to earn on your monthly saving between age 25 and 65 to accumulate enough money for retirement? ANSWER: What rate of return will you have to earn to accumulate enough at age 65 to fund your retirement?

5.22%

If the loan compounds on a monthly basis, what is the effective annual rate on the loan?

9.38%

What is an annuity?

A finite or limited # of payments of the same amount occurring on a regular schedule, like monthly, quarterly or annually.

A small retailer buys inventory from a supplier. The supplier charges $20 interest on each $100 of inventory and gives you 18 days to pay. A:What is the daily rate on this loan? B:How many pay periods are there in a year for this loan? C:What is the APR on this loan? D:What is the EAR on this loan?

A-1.11% B-20.28 C-405.56% D-3933%

You run a company and you have decided to add a new line of products to sell. The manufacturer offers to finance your inventory. The terms are $8 of interest for every $100 borrowed. They give you 15 days to pay back the loan. What is the APR on the loan? What is the ear on the loan?

APR=194.67% EAR=550.43%

What factors must you adjust if there is more than one compounding period per year associated with a time value of money problem? How do you make those adjustments?

Adjust the I/Y and the N. You must divide the annual I/Y by the # of periods per year to get the period I/Y. Multiply the number of years by the number of periods per year to get the total # of periods

You pay a monthly interest rate of 3% on your credit card. What is the APR on the card? What is the EAR on the card?

EAR=42.58% APR=36%

What are the parts to an amortization table?

PMT#, BegBal (Principal left), PMT, Interest (BEG*IR), Princ. Reduct. (PMT-INT), End Bal.

What happens to the amount of the payment allocated to pay interest as the loan ages?

It declines because principal is being paid off.

What happens to the amount of the payment allocated to pay principal as the loan ages?

It increases because the amount of interest declines, but the payment remains the same.

What happens to the amount of the monthly payment over time as the loan ages?

It stays the same

EAR=

[1 + (APR /npy)]npy - 1