FUNDAMENTALS OF FINANCIAL PLANNING FINAL EXAM 50 QUESTIONS

Kasey wants to give her daughter $25,000 in 8 years to start her own business. How much should she invest today at an annual interest rate of 8% compounded annually to have $25,000 in 8 years?

$13,506.72. N = 8 I = 8 PV = ? PMT = 0 FV = 25,000 Answer: 13,506.72

John and Jane have a net worth of $20,000 and total assets of $150,000. If their revolving credit and unpaid bills total $8,000, how much are their total liabilities?

$130,000 A - L = Net Worth 150,000 - L = 20,000 L = 130,000

Ann recently purchased a house for $220,000. She made a down payment of $20,000 and financed the balance over 15 years at 6%. If Ann's first payment is due on October 1st of the current year, how much of her current year's payments will be applied to the outstanding principal on the loan?

$2,073.47 N = 15 × 12 I = 6 ÷ 12 PV = 200,000 PMT = ? FV = 0 PMT Answer: 1,687.7136 1 INPUT 3 Orange shift key, AMORT, = PRIN Answer: 2,073.4740

Holly would like to plan for her daughter's college education. She would like for her daughter, who was born today, to attend college for 4 years, beginning at age 18. Tuition is currently $10,000 per year and tuition inflation is 7%. Holly can earn an after-tax rate of return of 10%. How much must Holly save at the end of each year, if she wants to make the last payment at the beginning of her daughter's first year of college?

$2,845.81 0 CFj (starting amount) 0 CFj (first year cashflow) 17 Nj (times to repeat first year cashflow) 10,000 CFj (year 18 starts the tuition payments) 4 Nj (1.10/1.07) - 1 × 100, i Orange shift key NPV Answer: 23,339.62 N = 18 I = 10 PV = 23,339.62 PMT = ? FV = 0 Answer: 2,845.80

Ann recently purchased a house for $220,000. She made a down payment of $20,000 and financed the balance over 15 years at 6%. If Ann's first payment is due on October 1st of the current year, how much interest will she pay in the current year?

$2,989.67 N = 15 × 12 I = 6 / 12 PV = 200,000 PMT = ? FV = 0 PMT Answer: 1,687.71 1 INPUT 3 Orange shift key, AMORT, = = INT answer: 2,989.6671

A client invested $10,000 in an interest bearing promissory note earning an 11% annual rate of interest compounded monthly. How much will the note be worth at the end of 7 years assuming all interest is reinvested at the 11% rate?

$21,522.04. Your calculator should be set to 1 payment per year. Dividing the N and I by 12 accounts for monthly compounding. N = 7 × 12 I = 11 / 12 PV = 10,000 PMT = 0 FV = ? Answer for FV is $21,522.036124, rounded to $21,522.04

Anthony has been investing $1,000 at the end of each year for the past 15 years. How much has accumulated assuming he has earned 10.5% compounded annually on his investment?

$33,060.04. N = 15 I = 10.5 PV = 0 PMT = 1,000 FV = ? 33,060.0354

Jennifer has the transactions below, what is the combined impact on her net worth when considering all of the transactions? I. She purchases $5,000 worth of a mutual fund with cash from her savings account. II. She spends $6,000 on a two-week vacation to Italy using funds in her money market account. III. She purchases $10,000 worth of furniture for her house and uses her credit card to finance the purchase.

$6,000 decrease in net worth - No change. Decrease in current assets of $5,000 and increase in invested assets of $5,000 - Decrease of $6,000 in current assets - No change. Personal use assets increases by $10,000 and current liabilities increase by $10,000

Phoebe purchased a car for $19,500. She is financing the auto at 11% annual interest rate, compounded monthly for 3 years. What payment is required at the end of each month to finance Phoebe's car?

$638.40 N = 3 × 12 I = 11 / 12 PV = 19,500 PMT = ? FV = 0 Answer: 638.40

Marge has been dollar cost averaging in a mutual fund by investing $2,000 at the beginning of every quarter for the past 7 years. She has been earning an average annual compound return of 11% compounded quarterly on this investment. How much is the fund worth today?

$84,996.80. Begin mode N = 7 × 4 I = 11 / 4 PV = 0 PMT = 2,000 FV = ? Answer: 84,996.80

Darrin and Kathi recently gave you the following financial information. Current Assets $9,243 Current Liabilities $6,921 Monthly Non-discretionary Expenses $4,693 Yearly Income $70,000 Annual Debt Expenses (excluding monthly housing costs) $22,084 What would Darrin and Kathi's Emergency Fund Ratio be?

1.9695 months 9,243 / 4,693

Kevin owns 1 share of Acme, Inc. stock. He purchased the stock three years ago for $25. The stock is currently trading for $29.50 per share. The stock has paid the following dividends over the past three years. Year 1) $1.50 Year 2) $2.00 Year 3) $2.50 What is the compounded rate of return (IRR) that Kevin has earned on this investment?

13.11% 25 +/- CFj 1.50 CFj 2.00 CFj 2.50 + 29.50 CFj Orange shift key IRR/YR Answer: 13.11

Holly's salary is $80,000 per year. She contributes 10% of her salary to her 401(k) plan. Her employer contributes 5% of her salary to a profit share plan. She also contributes $2,500 per year to an IRA. Holly's savings ratio is?

18% (8,000 + 4,000 + 2,500)/80,000 = 18%

Brian purchased 10 shares of an aggressive growth mutual fund at $90 per share, for a total of $900, 7 years ago. Today he sold all 10 shares for $4,500. What was his average annual compound rate of return on this investment before tax?

25.85% N = 7 I = ? PV = <900> PMT = FV = 4,500 Answer: 25.8499

A CFP® professional agrees to be bound by Continuing Education (CE) Requirements established by Certified Financial Planner Board of Standards. The CE Requirements for a regular continuing professional (not a new certificant or a certificant who has been inactive) are as follows:

30 hours of CE every two years.

Calculate the IRR of a machine that is purchased for $5,000, sold at the end of year 4 for $2,500, and produces the following cash flows: Year 1) $700 Year 2) $800 Year 3) $900 Year 4) $1,000

5.3% 5000 +/- CFj 700 CFj 800 CFj 900 CFj 1,000 + 2,500 CFj Orange shift key IRR/YR Answer: 5.3258

Calculate the NPV of a machine that is purchased for $5,000, sold at the end of year 4 for $2,500, and produces the following cash flows: Year 1) $700 Year 2) $800 Year 3) $900 Year 4) $1,000 Assume the discount rate is 6%.

<$99.64> 5000 +/- CFj 700 CFj 800 CFj 900 CFj 1,000 + 2,500 CFj 6 I/YR Orange shift key NPV Answer: <99.64>

All of the following statements concerning educational funding is correct EXCEPT

A common method for reducing a family's EFC is creating a trust for the parents and increasing the family's estate.

Trusts can be very beneficial in many financial planning situations. Many trust benefits, such as asset protection and control, are appropriate considerations for a family with a special needs person. Which of the following types of trusts would generally be used to protect an award from winning a lawsuit or an inheritance on behalf of a special needs child?

A trust under 42 U.S.C. Sec 1396p(d)(4)(A)

Gathering client data includes gathering which of the following?

A. Bank statements B. Tax returns C. Beliefs, attitude and desires of the client D. All of the above

Joe, a CERTIFIED FINANCIAL PLANNERTM professional, has prepared financial statements and conducted ratio analysis. Which step in the financial planning process is he in?

Analyzing the Client's Current Course of Action and Potential Alternative Courses of Action

Which of the following is not necessary to identify the client's life cycle position?

Attitudes (beliefs).

If your financial planning client talks about situations, expresses emotions verbally, enjoys listening (but cannot wait to talk), and tends to move lips or sub-vocalize when reading, then, their learning style is most likely

Auditory.

All of the following statements concerning financial aid programs for education funding are correct EXCEPT A. A Pell Grant is a grant from the federal government awarded to undergraduate students who have not earned a bachelors or professional degree. B. The EFC calculation, which is based on one's ACT score, is used to determine a student s eligibility for a Pell Grant and how much is awarded to a student. C. One type of Stafford Loan is the Direct Stafford Loan that is provided to the student directly from the Department of Education. D. One type of Stafford Loan is the FFEL Stafford Loan where funds are lent to the student through a lender (such as a bank or other approved financial institution) that participates in the FFEL program. Solution

B. The EFC calculation, which is based on one's ACT score, is used to determine a student s eligibility for a Pell Grant and how much is awarded to a student.

Which of the following statements concerning investment strategies to accomplish education-funding goals is (are) correct? I. The time horizon is probably the most important factor (besides risk tolerance) to consider in deciding what securities to invest in, how much to invest, and when to invest. II. QTPs generally reduce the risk level of investment the closer a child gets to college.

Both I and II Qualified Tuition plans, such as the 529 savings plan, have age banded investment options. The Investments will re-allocate as the child gets older and closer to their goal.

Which of the following debts are discharged in bankruptcy?

Consumer debt.

Balance sheet liabilities should be recorded at their:

Current outstanding balance.

All of the following statements concerning educational funding are correct EXCEPT: A. QTPs allow individuals to participate in prepaid tuition plans whereby tuition credits are purchased for a designated beneficiary for payment or waiver of higher education expenses, or participate in savings plans whereby contributions of money are made to an account to eventually pay for higher education expenses of a designated beneficiary. B. Prepaid Tuition Plans are plans where prepayment of college tuition is allowed at a fixed price for enrollment in the future. C. A Savings Plan is a type of QTP where the owner of the account contributes cash to the account so that the contributions can grow tax deferred. D. One of the disadvantages of QTPs is that the owner/contributor shares control of the account with the student/beneficiary. Solution

D. One of the disadvantages of QTPs is that the owner/contributor shares control of the account with the student/beneficiary.

All of the following statements concerning educational funding are correct EXCEPT: A. The American Opportunity Tax is a tax credit available for qualified tuition and enrollment fees incurred in the first four years of post-secondary education for the taxpayer, spouse, or dependent. B. The Lifetime Learning Credit is a tax credit available to pay for tuition and enrollment fees for undergraduate, graduate or professional degree programs. C. If used to pay for qualified higher education expenses at an eligible institution or state tuition plan, Series EE United States Savings Bonds bestow significant tax savings. D. The Uniform Gift to Minor's Act (UGMA) allows parents the option to put assets in a custodial account for a child once the child exceeds the age of 14.

D. The Uniform Gift to Minor's Act (UGMA) allows parents the option to put assets in a custodial account for a child once the child exceeds the age of 14.

All of the following statements regarding NPV are true EXCEPT A. A positive NPV indicates the present value of the cash flows exceeds the initial investment. B. A negative NPV indicates the present value of the cash flows is less than the initial investment. C. An NPV equal to zero indicates the present value of the cash flows is equal to the initial investment. D. The internal rate of return is the discount rate that causes the initial investment to exceed the present value of the cash flows. Solution

D. The internal rate of return is the discount rate that causes the initial investment to exceed the present value of the cash flows.

Which of the following situations would cause a shift in the demand curve, as opposed to a change in the quantity demanded? A. Federal income tax rates are decreased. B. Auto sales increase due to increased employment. C. Gasoline consumption decreases as the taxes on gasoline increase. D. Both a and b.

D. Both a and b.

A client in the asset accumulation phase is characterized by:

Discretionary cash flow for investing is low and debt to net worth is high.

Which of the following is/are not a duty owed by a CFP® professional under the CFP Board Code of Ethics and Standards of Conduct?

Duties Owed to other CFP® Professionals

Paul recently applied for CFP® Certification. Which of the following would always bar him from certification?

Felony conviction of embezzlement.

Which of the following statements accurately describes a financial advisor's communication with a client? I. One of the main responsibilities of the advisor is to extract the goals of the client through verbal and nonverbal communication. II. Clarifying and restating a client's statement is part of the process of feedback under active listening.

I and II.

Which of the following is/are true regarding revocation? I. Revocation is permanent unless due to a felony conviction that is subsequently overturned. II. A CFP® certificant may petition CFP Board for reinstatement after revocation if the certificant proves that he or she has been rehabilitated by clear and convincing evidence. III. Suspension is not always permanent.

I only

Darrin and Kathi recently gave you the following financial information. Current Liabilities $6,921 Monthly Non-discretionary Expenses $4,693 Yearly Income $70,000 Annual Debt Expenses (excluding monthly housing costs) $22,084 Which of the following lender thresholds will Darrin and Kathi meet assuming their monthly housing costs will be $1,500? I. The 28% benchmark II. The 36% benchmark

I only 28% Benchmark = 1,500 / (70,000/12) = 25.7% YES 36% Benchmark = (1,500 + (22,084/12)) / (70,000/12) = 57.2% NO

Which of the following is/are forms of discipline? Private Censure Revocation Suspension Public Letter of Admonition

I, II, III, and IV

Which of the following is/are a Duty Owed to Clients in the CFP Board Standards of Conduct? I. Independence II. Professionalism III. Competence IV. Fairness

II and III Fairness is not specifically listed in the Standards of Conduct but is a value to uphold while dealing with clients and fellow professionals.

Which of the following statements concerning a CFP® professional's disclosure of confidential client data is generally correct? I. Disclosure may be made to any state agency without subpoena. II. Disclosure may be made to any party on consent of the client. III. Disclosure may be made to comply with an IRS audit request.

II only

Which of the following statements concerning supply and/or demand is/are true?

If demand decreases and supply simultaneously increases, equilibrium price will fall.

Which of the following is not a primary responsibility of the Federal Reserve (Fed)?

Maintain fair practices between securities dealers.

Which of the following is true regarding demand? I. The average income or standard of living is a key determinant of demand. II. Downward sloping demand indicates that if the price is decreased, the quantity demanded will fall.

Only statement I is correct. Statement I is a true statement. Demand for products will be greater when disposable income is greater. Statement II is a false statement. The correct version of the statement is: Downward sloping demand curve indicates that as price decrease, quantity demanded will INCREASE.

According to the cash flow approach, all of the following recommendations may have a positive impact to cash flow except:

Purchase new insurance to cover an existing risk.

If the Federal Reserve wants to increase interest rates, which of the following actions might they take?

Sell government securities.

Which of the following is not correct regarding the Federal Reserve?

The Bank Borrowing Rate is the overnight lending rate between member banks.

Which of the following approaches provides the planner and client with a methodology in order to reach goals by covering risks, short term and long term savings and investments:

Three panel approach.

The balance sheet equation is:

Total Assets - Total Liabilities = Net Worth.

During which step of the financial planning process would a planner review financial statement information?

Understanding the Client's Personal and Financial Circumstances. From the CFP Board Code and Standards 1. Understanding the Client's Personal and Financial Circumstances Obtaining Qualitative and Quantitative Information. ACFP® professional must describe to the Client the qualitative and quantitative information concerning the Client's personal and financial circumstances needed to fulfill the Scope of Engagement and collaborate with the Client to obtain the information. Examples of qualitative or subjective information include the Client's health, life expectancy, family circumstances, values, attitudes, expectations, earnings potential, risk tolerance, goals, needs, priorities, and current course of action. Examples of quantitative or objective information include the Client's age, dependents, other professional advisors, income, expenses, cash flow, savings, assets, liabilities, available resources, liquidity, taxes, employee benefits, government benefits, insurance coverage, estate plans, education and retirement accounts and benefits, and capacity for risk. Analyzing Information. ACFP® professional must analyze the qualitative and quantitative information to assess the Client's personal and financial circumstances. Addressing Incomplete Information. If unable to obtain information necessary to fulfill the Scope of Engagement, the CFP® professional must either limit the Scope of Engagement to those services the CFP® professional is able to provide or terminate the Engagement.

You are a CFP® professional who has been approached by the general partner of Silky Industries (SI) to provide financial planning services to the top executives at SI. Your sister has a fifteen percent limited partnership interest in SI. Can you accept this engagement?

Yes, but only after proper disclosure.