Financial planning
1. 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?
2. At an annual interest rate of five percent, how long would it take for your savings to double?
3. 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?
4. 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?
5. What would be the yearly earnings for a person with $6,000 in savings at an annual interest rate of 5.5
percent?
6. 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.
7. 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?
8. 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.)
9. Based on the following data, compute the total assets, total liabilities, and net worth.
Liquid assets, $3,670
Investment assets, $8,340 Long-term liabilities, $76,230
Current liabilities, $2,670
10. 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
1. 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?
2. 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.
3. What would be the average tax rate for a person who paid taxes of $4,864.14 on a taxable income of
$39,870?
4. A payday loan company charges 4 percent interest for a two-week period. What would be the annual
interest rate from that company?
5. 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?
2. 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?
3. 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?
4. 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?
5. 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
1. 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?
2. 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.
What is the rate of return for this investment?
Is the rate of return a positive or negative number?
3. 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.
4. 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.
5. 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?
6. 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.
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