Personal Financial Planning – All 7 Weeks Problem Sets
Problem Set 1
(Note: Some of these problems require the use of the time value of money tables in the Chapter 1 Appendix).
- Ben Collins plans to buy a house for $65,000. If that real estate property is expected to increase in value 5 percent each year, what would its approximate value be seven years from now?
- At an annual interest rate of five percent, how long would it take for your savings to double?
- In the mid-1990s, selected automobiles had an average cost of $12,000. The average cost of those same motor vehicles is now $20,000. What was the rate of increase for this item between the two time periods?
- A family spends $28,000 a year for living expenses. If prices increase by 4 percent a year for the next three years, what amount will the family need for its living expenses?
- What would be the yearly earnings for a person with $6,000 in savings at an annual interest rate of 5.5 percent?
- Elaine Romberg prepares her own income tax return each year. A tax preparer would charge her $60 for this service. Over a period of 10 years, how much does Elaine gain from preparing her own tax return? Assumes she can earn 3 percent on her savings.
- Tran Lee plans to set aside $1,800 a year for the next six years, earning 4 percent. What would be the future value of this savings amount?
- If you borrow $8,000 with a 5 percent interest rate to be repaid in five equal payments at the end of the next five years, what would be the amount of each payment? (Note: Use the present value of an annuity table in the Chapter 1 Appendix.)
- Based on the following data, compute the total assets, total liabilities, and net worth.
Liquid assets, $3,670 Household assets, $89,890
Investment assets, $8,340 Long-term liabilities, $76,230
Current liabilities, $2,670
- Which of the following employee benefits has the greater value? Use the formula given in the “Financial Planning Calculations” – “Tax-Equivalent Employee Benefits” box found in Chapter 2 to compare these benefits. (Assume a 28 percent tax rate.)
A nontaxable pension contribution of $4,300 or the use of a company car with a taxable value of $6,325.
Problem Set 2
- Thomas Franklin arrived at the following tax information:
Gross salary, $46,660
Interest earnings, $225
Dividend income, $80
One personal exemption, $3,400
Itemized deductions, $7,820
Adjustments to income, $1,150
What amount would Thomas report as taxable income?
- What would be the net annual cost of the following checking account?
Monthly fee, $3.75; processing fee, 25 cents per check; checks written, an average of 22 a month.
- What would be the average tax rate for a person who paid taxes of $4,864.14 on a taxable income of $39,870?
- A payday loan company charges 4 percent interest for a two-week period. What would be the annual interest rate from that company?
- What is the annual opportunity cost of a checking account that requires a $350 minimum balance to avoid service charges? Assume an interest rate of 6.5 percent.
Problem Set 3
- Louise McIntyre’s monthly gross income is $2,000. Her employer withholds $400 in federal, state, and local income taxes and $160 in Social Security taxes per month. Louise contributes $80 per month for her IRA. Her monthly credit payments for VISA, MasterCard, and Discover card are $35, $30, and $20, respectively. Her monthly payment on an automobile loan is $285. What is Louise’s debt payments-to-income ratio? Is Louise living within her means?
- Calculating Debt Payments – to – Income Ratio. Suppose that your monthly net income is $2,400. Your monthly debt payments include your student loan payment, a gas credit card and they total $360. What is your debt payments – to – income ratio?
- Dave borrowed $500 for one year and paid $50 in interest. The bank charged him a $5 service charge.
A- What is the finance charge on this loan?
B- Dave borrowed $500 on January 1, 2006, and paid it all back at once on December 31, 2006. What was the APR?
C- If Dave paid the $500 in 12 equal monthly payments, what is the APR?
- Calculating Simple Interest on a Loan. Damon convinced his aunt to lend him $2,000 to purchase a plasma digital TV. She has agreed to charge only 6 % simple interest, and he has agreed to repay the loan at the end of one
year. How much interest will he pay for the year?
- After visiting several automobile dealerships, Richard Welch selects the car he wants. He likes its $10,000 price, but financing through the dealer is no bargain. He has $2,000 cash for a down payment, so he needs an $8,000 loan. In shopping at several banks for an installment loan, he learns that interest on most automobile loans is quoted at add-on rates. That is, during the life of the loan, interest is paid on the full amount borrowed even though a portion of the principal has been paid back. Richard borrows $8,000 for a period of four years at an add-on interest rate of 11 percent.
Questions
a. What is the total interest on Richard’s loan?
b. What is the total cost of the car?
c. What is the monthly payment?
d. What is the annual percentage rate (APR)?
Problem Set 4
- Determining Profit or Loss from an Investment. Three years ago, you purchased 150 shares of IBM stock for $88 a share. Today, you sold your IBM stock for $103 a share. For this problem, ignore commissions that would be charged to buy and sell your IBM shares.
a. What is the amount of profit you earned on each share of IBM stock?
b. What is the total amount of profit for your IBM investment?
- Calculating Rate of Return. Assume that at the beginning of the year, you purchase an investment for
$8,000 that pays $100 annual income. Also assume the investment’s value has decreased to $7,400 by the end of the year.
a.
What is the rate of return for this investment?
b.
Is the rate of return a positive or negative number?
- Calculating Earnings Per Share, Price-Earnings Ratio, and Book Value. As a stockholder in Bozo Oil Company, you receive its annual report. In the financial statements, the firm has reported assets of $9 million, liabilities of $5 million, after-tax earnings of $2 million, and 750,000 outstanding shares of common stock.
a. Calculate the earnings per share of Bozo Oil’s common stock.
b. Assuming that a share of Bozo Oil’s common stock has a market value of $40, what is the firm’s price-earnings ratio?
c. Calculate the book value of a share of Bozo Oil’s common stock.
- Determining Interest and Approximate Bond Value. Assume that three years ago, you purchased a corporate bond that pays 9.5 percent. The purchase price was $1,000. Also assume that three years after your bond investment, comparable bonds are paying 8 percent.
a. What is the annual dollar amount of interest that you will receive from your bond investment?
b. Assuming that comparable bonds are paying 8 percent, what is the approximate dollar price for which you could sell your bond?
c. In your own words, explain why your bond increased or decreased in value.
- Using Margin. Bill Campbell invested $4,000 and borrowed $4,000 to purchase shares in Wal-Mart. At the time of investment, Wal-Mart was selling for $45 a share.
a. If Bill paid $30 commission, how many shares could Bill buy if he used only his own money and did not use margin?
b. If Bill paid $50 commission, how many shares could Bill buy if he used his $4,000 and borrowed $4,000 on margin to buy Wal-Mart stock?
c. Assuming that Bill did use margin, paid $90 commission to sell his stock, and sold his Wal-Mart stock for $53, how much profit did he make on his Wal-Mart investment?
- Calculating yields. Assume you purchased a corporate bond at its current market price of $850 on January 2, 2002. It pays 9 percent interest and it will mature on December 31, 2011, at which time the corporation will pay you the face value of $1,000.
a. Determine the current yield on your bond investment at the time of purchase.
b. Determine the yield to maturity on your bond investment.
Problem Set 5
- Tammy Monahan is considering the purchase of a home entertainment center. The product attributes and weights she plans to consider are:
portability .1
sound projection .6
warranty .3
Tammy rated the brands as follows:
portability
sound projection
warranty
Brand A
6
8
7
Brand B
9
6
8
Brand C
5
9
6
Using the Consumer Buying Matrix presented in Chapter 8, conduct a quantitative product evaluation rating for each brand. What other factors is Tammy likely to consider when making her purchase?
- Based on the following, calculate the costs of buying and of leasing a motor vehicle.
Purchase Costs
Leasing Costs
Down payment $1,500
Security deposit $500
Loan payment $450 for 48 months
Lease payment $450 for 36 months
Estimated value at
End of loan $4,000
End of lease charges $600
Opportunity cost interest rate: 4 percent
- You can purchase a service contract for all of your major appliances for $180 a year. If the appliances are expected to last for 10 years, and you earn 5 percent on your savings, what would be the future value of the amount you would pay for the service contract?
- You estimate that you can save $3,800 by selling your own home rather than using a real estate agent. What would be the future value of that amount if invested for five years at 7 percent?
- John Walters is comparing the cost of credit to the cash price of an item. If John makes a $60 down payment, and pays $34 a month for 24 months, how much more would that be than the cash price of $695?
Problem Set 6
- For each of the following situations, what amount would the insurance company pay?
a. Wind damage of $835; the insured has $500 deductible.
b. Theft of a stereo system worth $1,300; the insured has a $250 deductible.
c. Vandalism that does $425 of damage to a home; the insured has a $500 deductible.
- Beverly and Kyle Nelson currently insure their cars with separate companies paying $650 and $575 a year. If they insure both cars with the same company, they would save 10 percent on the annual premiums. What would be the future value of the annual savings over ten years based on an annual interest rate of 6 percent?
- As of 2008, per capita spending on health care in the United States was about $8,000. If this amount increased by 5 percent a year, what would be the amount of per capital spending for health care in 10 years?
Sarah’s comprehensive major medical health insurance plan at work has a deductible of $750. The policy pays 85 percent of any amount above the deductible. While on a hiking trip, she contracted a rare bacterial disease. Her medical costs for treatment, including medicines, tests, and a six-day hospital stay, totaled $8,893. A friend told her that she would have paid less if she had a policy with a stop-loss feature that capped her out-of-pocket expenses at $3,000. Was her friend correct? Show your computations. Then determine which policy would have cost Sarah less and by how much.
- The Kelleher family has health insurance coverage that pays 80 percent of out-of-hospital expenses after a $500 deductible per person. If one family member has doctor and prescription medication expenses of $1,100, what amount would the insurance company pay?
- You are the wage earner in a “typical family,” with $40,000 gross annual income. Use the easy method to determine how much life insurance you should carry.
Problem Set 7
- Calculating Net Asset Value. Given the information below, calculate the net asset value for the Boston Equity mutual fund.
Total assets
$225,000,000
Total liabilities
5,000,000
Total number of shares
4,400,000
- Calculating the Rate of Return of Investment Using Financial Leverage. Suppose Shaan invested just $10,000 of his own money and had a $90,000 mortgage with an interest rate of 8.5 percent. If after three years he sold the property for $120,000. a. What is his gross profit? b. What is his net profit/loss? c. What is the rate of return on investment?
- Shelly’s assets include money in the checking and savings accounts, investments in stocks and mutual funds, personal property, such as furniture, appliances, an automobile, coin collection and jewelry. Shelly calculates that her total assets are $108,800. Her current unpaid bills, including an auto loan, credit card balances, and taxes total $16,300. Calculate Shelly’s net worth.
- Barry and his wife Mary have accumulated over $4 million during their 45 years of marriage. They have three children and five grandchildren.
A- How much money can Barry and Mary gift to their children in 2008 without any gift tax liability?
B- How much money can Barry and Mary gift to their grandchildren?
C- What is the total amount of estate removed from Barry and Mary’s estate?
- Dave bought a rental property for $200,000 cash. One year later, he sold it for $240,000.
A- What was the return on his $200,000 investment?
B- Suppose Dave invested only $20,000 of his own money and borrowed $180,000 (interest free from his rich father). What was his return on investment?