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FIN 4320 Final

Question 1

A household has the following statistics related to Balance Sheet and annual Cash Flow:

Balance Sheet Items:

in Dollars

Cash

2,500

CD

12,000

Savings Account Balance

3,500

Credit Card Debt

9,500

Current Year Portion of mortgage

7,800

Cash Flow Items:

Salary

115,000

Dividend Income

1,500

Discretionary Expenses

8,000

Nondiscretionary Expenses

28,975

Debt Repayment

8,700

Retirement Investments

15,500

Capital Expenditure

-

Compute the Current Ratio.

Answer:- 1.04

Question 2

A household has the following statistics related to Balance Sheet and annual Cash Flow:

Balance Sheet Items:

in Dollars

Cash

2,500

CD

12,000

Savings Account Balance

3,500

Credit Card Debt

9,500

Current Year Portion of mortgage

7,800

Cash Flow Items:

Salary

115,000

Dividend Income

1,500

Discretionary Expenses

8,000

Nondiscretionary Expenses

28,975

Debt Repayment

8,700

Retirement Investments

15,500

Capital Expenditure

-

Compute the Nondiscretionary Cost percentage

Answer:- 24.87%

Question 3

Consider the following information of a Whole Life policy and a Term Life policy:

Guaranteed Contract Premium

Guaranteed Death Benefit

Projected
Dividend

Projected Cash Value

Term Premium

$2,300

$200,000

0

0

$325

$2,300

0

0

$330

$2,300

0

0

$335

$2,300

0

$3,500

$340

$2,300

$250

$6,000

$355

$2,300

$400

$9,000

$370

$2,300

$600

$13,000

$390

Which policy is better if cash can be invested at 9% return?

Answer:- Term Life Policy since IRR of difference in cash flows is less than 9%

Question 4

Which of the following insurance is intended to provide a limited choice of investments and an insurance component in the event of death?

Answer:- Universal Life

Question 5

Which of the following insurance categories provides coverage that makes payments to replace income of the insured once the person is incapacitated?

Answer:- Disability

Question 6

Peter who is self-employed has the following income and expenses during the year:

Business Income

115,000

Interest Income

1,500

Dividend Income

2,200

Hobbies

550

Recreational Expenses

5,500

Vacation Expenses

2,500

Alimony

950

Healthcare Cost

5,250

Clothing Expenses

780

Insurance Cost

6,250

Food Expenses

8,275

Taxes

1,150

Furniture Cost

12,000

Debt Repayment

22,000

New Debt Taken

2,575

Retirement investments

15,500

What is the total cash flow during the year?

Answer:- $56,070

Question 7

Peter who is self-employed has the following income and expenses during the year:

Business Income

115,000

Interest Income

1,500

Dividend Income

2,200

Hobbies

550

Recreational Expenses

5,500

Vacation Expenses

2,500

Alimony

950

Healthcare Cost

5,250

Clothing Expenses

780

Insurance Cost

6,250

Food Expenses

8,275

Taxes

1,150

Furniture Cost

12,000

Debt Repayment

22,000

New Debt Taken

2,575

Retirement investments

15,500

What is the total non-discretionary expenses during the year?

Answer:- $22,655

Question 8

Johnson family has found that the current cost of attending college is $27,000 per year. How much lump sum amount they should have in their education account so that the 4 years of college is funded? Assume education inflation to be 6.25% and investment return to be 7% per year.

Answer:- $106,870

Question 9

Which one of the following is an example of an annuity?

Answer:- the payment of $259 a month for three consecutive years

Question 10

Steve is planning to retire in couple of years. He has estimated that his annual requirement at the beginning of the1st year of retirement would be $75,000 per year. He expects to live for 22 years after retirement. How much should be the accumulated (lump sum) amount in his retirement account at the beginning of retirement so that his post retirement period is funded. Assume inflation to be 2.75% and investment return to be 8.25% per year.

Answer:- $1,007,417

Question 11

Consider the following information of a Whole Life policy and a Term Life policy:

Guaranteed Contract Premium

Guaranteed Death Benefit

Projected
Dividend

Projected Cash Value

Term Premium

$2,300

$200,000

0

0

$325

$2,300

0

0

$330

$2,300

0

0

$335

$2,300

0

$3,500

$340

$2,300

$250

$6,000

$355

$2,300

$400

$9,000

$370

$2,300

$600

$16,000

$390

What is the IRR of difference in cash flows between Whole Life and Term Life policies?

Answer:- 7.79%

Question 12

Marvin had two term policies to compare with costs as shown below. Based on 7% after tax discount rate, which one should he select and why?
Years Policy A Policy B
1 $175 $225
2 $215 $230
3 $250 $235
4 $270 $260
5 $290 $285

Answer:- Policy A, since NPV of Policy A is $968 while NPV of Policy B is $1005

Question 13

Maria wants to accumulate $45,000 in today's dollar terms in the next 6 years. She expects to earn a return of 6.25% per year and inflation is expected to be 1.75%. How much should be the serial payment in the 1st year so that Maria can achieve the target?

Answer:- $6830

Question 14

Maria wants to accumulate $45,000 in today's dollar terms in the next 6 years. She expects to earn a return of 6.25% per year and inflation is expected to be 1.75%. How much should be the serial payment in the 4th year so that Maria can achieve the target?

Answer:- $7196

Question 15

Maria wants to accumulate $45,000 in today's dollar terms in the next 6 years. She expects to earn a return of 6.25% per year and inflation is expected to be 1.75%. How much should be the serial payment in the 5th year so that Maria can achieve the target?

Answer:- $7321

Question 16

Consider the following statistics for a household's annual cash flow: Net Cash Flow ($3,400); Nondiscretionary Expenses ($32,750); Discretionary Expenses ($9,250); Retirement Investments ($13,500) and Debt Repayment ($4750).

Calculate the Gross Savings percentage.

Answer:- 34.01%

Question 17

Dorothy has $750 in cash, $2000 in savings account, $34,300 in stocks, $5,500 in bonds, and owns a car worth $15,500. She had $1,500 in credit card payments and an education loan of $24,000 of which $2,700 is due during the current year. She has a mortgage loan of $300,000 of which $7,000 due this year. She has an auto loan of $9,500 of which $3,700 is due in the next 12 months. She owns a home worth $350,000, furniture and fixtures of $1,500, appliances with a value of $1,000, a Condo worth $120,000 and stamp collection of $1,000. She also has mortgage on condo for $97,500 of which $3,200 is payable during the current year.

What is Dorothy total current assets?

Answer:- $2,750

Question 18

Dorothy has $750 in cash, $2000 in savings account, $34,300 in stocks, $5,500 in bonds, and owns a car worth $15,500. She had $1,500 in credit card payments and an education loan of $24,000 of which $2,700 is due during the current year. She has a mortgage loan of $300,000 of which $7,000 due this year. She has an auto loan of $9,500 of which $3,700 is due in the next 12 months. She owns a home worth $350,000, furniture and fixtures of $1,500, appliances with a value of $1,000, a Condo worth $120,000 and stamp collection of $1,000. She also has mortgage on condo for $97,500 of which $3,200 is payable during the current year.

What is Dorothy total household assets?

Answer:- $18,000

Question 19

Dorothy has $750 in cash, $2000 in savings account, $34,300 in stocks, $5,500 in bonds, and owns a car worth $15,500. She had $1,500 in credit card payments and an education loan of $24,000 of which $2,700 is due during the current year. She has a mortgage loan of $300,000 of which $7,000 due this year. She has an auto loan of $9,500 of which $3,700 is due in the next 12 months. She owns a home worth $350,000, furniture and fixtures of $1,500, appliances with a value of $1,000, a Condo worth $120,000 and stamp collection of $1,000. She also has mortgage on condo for $97,500 of which $3,200 is payable during the current year.

What is Dorothy total marketable investments?

Answer:- $39,800

Question 20

What is the difference in future value between savings in which $2,500 is deposited each year at the beginning of the period and the same amount deposited at the end of the period? Assume an interest rate of 5.25% per year and that both are due at the end of 12 years.

Answer:- $2120

FIN 4320 Exam 1

FIN 4320 Exam 2

FIN 4320 Final

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