Finance 1200 Fall 2005

Test 1

True/False

  1. Your net worth is the value of what you own minus the value of what you owe.
  2. Any funds that you have beyond what you need to remain liquid should be invested to provide you with a return on your investment.
  3. You should manage your investments so as to maximize your return and minimize your risk.
  4. Financial plans rarely differ across individuals, even if every individual is in a different financial position.
  5. We use money for two purposes—consumption and savings.
  6. A business cycle is a pattern of economic activity that includes expansion, recession, and recovery.
  7. All things considered, a saver who earns 6 percent interest on a savings account when the rate of inflation is 6 percent is losing real purchasing power.
  8. When one forgoes buying a new television set because he/she spends the money on college books. The television set is the opportunity cost of buying the books.
  9. Opportunity costs are strictly financial in nature and do not involve personal tastes and preferences.
  10. Marginal cost is the incremental cost of one more unit of something.
  11. Simple interest is the interest computed on principal only and without compounding.
  12. The tax advantage of an Flexible Spending Account occurs because the deducted amounts of salary avoid federal income tax, Social Security taxes, and in most states, state income taxes, thereby allowing selected personal expenses to be paid with pretax income.
  13. Specific goals should be measurable, attainable, relevant, and time related.
  14. A balance sheet describes an individual’s financial progress over a period of time, generally a year.
  15. Monetary assets are assets and non-cash items that can readily be converted to cash.
  16. Short-term liabilities is a term used for debt obligations to be paid off within one year.
  17. The liability section of the balance sheet would include money owed to a bank or financial institution but would not include money owed to a friend.
  18. A low asset-to-debt ratio is a positive indicator of financial well-being.
  19. The time value of money implies that a dollar received tomorrow is worth more than a dollar received today.
  20. The process of obtaining future values is referred to as discounting.
  21. To determine the present value of a future sum, it is necessary to know the interest rate to be earned on your deposit.
  22. Keeping track of actual revenues and expenses is not important in creating one’s cash flow (income) statement.
  23. Time value calculations are more appropriate for long-term goals than for short-term goals.
  24. Variable expenses are more difficult to estimate than fixed expenses.

Multiple Choice

  1. A(n) ______represents what you give up as a result of making an alternative decision.
  2. Liquidity need
  3. Opportunity cost
  4. Purchasing price
  5. Financing cost
  6. Your ______is (are) the value of what you own minus the value of what you owe.
  7. Net worth
  8. Net assets
  9. net liabilities
  10. budget
  11. ______is access to funds to cover any short-term cash deficiencies.
  12. Money management
  13. Liquidity
  14. Credit management
  15. Cash management
  16. Jenny and Jeff are saving monthly so they can buy a home, but they are currently renting an apartment. The apartment is part of their
  17. Standard of living.
  18. Level of living.
  19. Savings.
  20. None of the above.
  21. Which of the following is usually easiest for people to forecast?
  22. Income
  23. Inflation
  24. Interest rates
  25. Economic growth
  26. A good time to buy stock is when the economy is
  27. In the prosperity of the expansion stage.
  28. In the trough of a recession.
  29. Starting into the recovery stage.
  30. There is never a good time to buy stock, hide your money under your mattress instead.
  31. Dezaray Lynch received a $3,000 raise this year. This increased her salary as an associate TV producer from $30,000 to $33,000. What percentage increase in nominal income did Dezaray receive?
  32. 14.6 percent
  33. 11.3 percent
  34. 10.0 percent
  35. 9.1 percent
  1. If your income increased from $23,000 to $26,000 during a period when the rate of inflation was 4 percent, your real income after the raise was
  2. $23,000
  3. $24,000
  4. $25,000
  5. $26,000
  6. Corky, a college teaching assistant, received a raise of $1,000 from $12,000 to $13,000 this year. If inflation was 2 percent over the same period, which of the following is true?
  7. Corky’s increase in real income was $1,000
  8. Corky’s increase in real income was 8.3%
  9. Corky’s increase in real income was $745
  10. Corky’s increase in real income was both 8.3 percent and $745
  11. Jeff and Sarah’s family income increased from $50,000 to $52,000 the past year. Inflation was 3 percent over the same time period. Which of the following is true regarding Jeff and Sarah’s income?
  12. Their nominal income increased 4 percent.
  13. Their nominal income increased 1 percent.
  14. Their real income decreased 4 percent.
  15. Both b and c.
  16. Using the information from problem 34, how much is Jeff and Sarah’s real income after the $2,000 increase in income?
  17. $52,000
  18. $50,485
  19. $50,000
  20. $49,685
  21. Kurt spent $80 on a new sweater rather than using this money to buy his textbook for his personal finance class. The cost of doing without his textbook is called the ______cost.
  22. Marginal
  23. Utility
  24. Opportunity
  25. Present
  26. Raymond just received a $1,500 Christmas bonus from his employer. Knowing that he pays 27% marginal tax rate for federal income tax, that his state income tax is 3%, and that the Social Security tax rate is 7.65%, approximately how much of the bonus will Raymond have to spend on Christmas?
  27. $1,500
  28. $1,080
  29. $935
  30. $580
  1. Jacalyn is in the 30 percent marginal tax bracket. She can earn $500 investing in a taxable bond or $375 investing in a tax-exempt bond. Which of these bonds provide her with the most after-tax income?
  2. The taxable bond
  3. The tax-exempt bond
  4. They provide her the same after-income tax income.
  5. There is not enough information to determine.
  6. Grandmother Smith has just put $20,000 into an investment earning 8% for her granddaughter’s college education. Approximately how much will be in the account in 15 years assuming all the interest is left in the account?
  7. $67,000
  8. $63,444
  9. $55,180
  10. $36,000
  11. Betty and Bill just received $25,000 as a gift. If they decide to spend $5,000 now and put the remaining $20,000 in an investment earning 9% compounded annually, approximately how much will they have at the end of the eighth year?
  12. $45,340
  13. $42,610
  14. $39,860
  15. $25,520
  16. Housing values are appreciating at a rate of 3% a year. Approximately how much will your $100,000 house be worth in 10 years if this rate of appreciation continues?
  17. $134,390
  18. $146,320
  19. $155,080
  20. $174,410
  21. A balance sheet includes _____ and ______
  22. Income; expenses
  23. Assets; expenses
  24. Income; liabilities
  25. Assets; liabilities
  26. Assets on the balance sheet are valued at their ______
  27. Fair market value.
  28. Original purchase price.
  29. Replacement cost.
  30. Sentimental value
  31. The formula for calculating net worth is
  32. Income minus expenses
  33. Assets minus liabilities
  34. Income minus liabilities
  35. Assets minus expenses
  1. Food, clothing, and entertainment are examples of
  2. Short-term liabilities
  3. Variable expenses
  4. Fixed expenses
  5. Long-term liabilities
  6. Jenny Santana is developing an annual budget based on her monthly cash flow. In a typical month, Jenny experiences cash inflow of $2,200 and cash outflow of $1,500. Based on this information, Jenny’s net cash flow in the annual budget is
  7. $700
  8. $7,700
  9. $8,100
  10. $8,400
  11. The personal ______summarizes your assets, your liabilities, and your net worth.
  12. Income statement
  13. Balance sheet
  14. Statement of cash flow
  15. Budget
  16. Sarah Evans has total assets of $10,000, including a car that is currently worth $1,500. Sarah’s liabilities total $5,000. Based on this information, what is Sarah’s net worth?
  17. -$5,000
  18. $5,000
  19. $10,000
  20. -$10,000
  21. Using the information from problem 48, if Sarah trades her old car to purchase a new one that costs $25,000 and she writes a check for $5,000 of it and finances the remainder of the cost over five years, what is Sarah’s net worth?
  22. $30,000
  23. $28,500
  24. $5,000
  25. $23,500
  26. The time value of money implies that a dollar received today is worth ______a dollar received tomorrow.
  27. Less than
  28. More than
  29. The same as
  30. None of the above
  31. When you graduate from college in four years, you would like to have $30,000 to make a down payment on a house. Assuming you can earn a return of 9 percent annually, you have to invest ______today to realize your goal.
  32. $15,055.99
  33. $25,156.84
  34. $21,240.00
  35. $27,471.90
  1. Jeff Bloom is 23 years old and wants to retire when he is 45. Jeff believes that $1 million will be sufficient for his retirement. If Jeff can earn an interest rate of 7 percent annually, he has to invest ____ today to have the $1 million when he is 45 years old.
  2. $226,000
  3. $141,000
  4. $450,000
  5. $610,000
  6. A tax that requires a higher income person to pay a higher percentage of his/her income in taxes is called a ____ tax.
  7. Progressive
  8. Regressive
  9. Proportional
  10. Marginal
  11. Which of the following taxes is/are progressive?
  12. Federal income taxes
  13. State sales taxes
  14. Social security taxes
  15. All of these
  16. Steven Scott’s total income is $30,000, but his taxable income is only $23,450. Therefore, his tax liability is $3,518. Steven’s average tax rate is _____ percent.
  17. 7
  18. 12
  19. 15
  20. 28
  21. Jeff is trying to decide whether or not to sell his baseball card collection. He has been offered $4,000 by a dealer who has agreed to pay Jeff this price now or in January of next year. This year Jeff is in the 27 percent marginal tax bracket, but next year Jeff expects to be in the 15 percent marginal tax bracket. Therefore, the estimated income tax liability on this $4,000 income would be _____ this year and ____next year.
  22. $1,120;$1,120
  23. $600;$600
  24. $1,080;$600
  25. $600;$1,120
  26. Assuming you have a tax liability, your average tax rate
  27. Equals your marginal tax rate.
  28. Is greater than your marginal tax rate.
  29. Is less than your marginal tax rate.
  30. I have no idea and I wish Dr. Basford would quit asking these questions.
  31. You are legally required to include which of the following in gross income?
  32. Interest received
  33. Lottery winnings
  34. Illegal income
  35. All of the above
  1. Which of the following will not affect the amount of taxes you pay?
  2. Taking a third job to enhance your wealth.
  3. Purchasing a home that will be financed with a mortgage.
  4. Contributing a portion of your salary to your retirement account.
  5. All of the above will affect the amount of taxes you pay.
  6. ______is not a filing status
  7. Single
  8. Married filing separate returns
  9. Qualifying widow(er) with independent child
  10. Head of household
  11. _____ are specific expenses that can be deducted to reduce taxable income
  12. Standard deductions
  13. Itemized deductions
  14. Exemptions
  15. Adjusted expenses

Short answer

  1. Stephanie Spratt wants to determine her assets, liabilities and net worth. She has $500 in cash, $3,500 in her checking account, $1,000 of furniture, a car worth $1,000, 100 shares of stock worth $30 a share, and a balance of $2,000 on her credit card. What is the total value of Stephanie’s assets?
  2. Using the information from problem 62, what is Stephanie’s liabilities?
  3. Using the information from problem 62, what is Stephanie’s net worth?
  4. Stephanie Spratt is considering purchasing a new car for $20,000. To make the purchase, she would trade in her existing car, which has a market value of about $1,000; write a check for $3,000 as a down payment on the car; and obtain a five-year loan for $16,000 to cover the remaining amount owed to the car dealer. Assuming she began with $500 of cash; $3,500 in checking; $1,000 of furniture; $3,000 in stocks; and her car as assets. Also assume she had $2,000 of credit card debt, how does this new car purchase affect her net worth?
  5. Assuming Stephanie Spratt’s original balance sheet (prior to purchasing the new car) from problem 65, what is her debt-to-asset ratio?
  6. Suppose that you have won the lottery and will receive $150,000 at the end of every year for the next 20 years. As soon as you receive the payments, you will invest them at your bank at an interest rate of 7 percent annually. How much will be in your account at the end of 20 years (assuming you do not make any withdrawals)?
  7. Stephanie Spratt earned a salary of $38,000 this year. Assuming she is subject to total FICA taxes of 7.65 percent, how much FICA tax will she pay?

Answers

  1. True
  2. True
  3. True
  4. False
  5. True
  6. True
  7. True
  8. True
  9. False
  10. True
  11. True
  12. True
  13. True
  14. False
  15. True
  16. True
  17. False
  18. False
  19. False
  20. False
  21. True
  22. False
  23. True
  24. True
  25. B
  26. A
  27. B
  28. B
  29. A
  30. B
  31. C
  32. C
  33. C
  34. A
  35. B
  36. C
  37. C
  38. B
  39. B
  40. C
  41. A
  42. D
  43. A
  44. B
  45. B
  46. D
  47. B
  48. B
  49. C
  50. B
  51. C
  52. A
  53. A
  54. A
  55. B
  56. C
  57. C
  58. D
  59. D
  60. C
  61. B
  62. $9,000
  63. $2,000
  64. $7,000
  65. There would be no affect on her net worth. Her net worth would still be the same, $7,000.
  66. 22.22%
  67. $6,149,250
  68. $2,907