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 
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 selfemployed 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 selfemployed 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 nondiscretionary 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 
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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