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Finance 4320 Exam 1

1. Johnson family has found that the current cost of attending college is \$25,000 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 7.5% per year. BGN MODE

• \$98, 269

PV = ? = \$98,269.29 = \$98,269

N = 4

I/Y = (1+.075)/(1+.0625) -1 = 1.1765%

PMT = \$25,000

FV = 0

2. Steve is planning to retire in couple of years. He has estimated that his annual requirement at the beginningof 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. BGN MODE

• \$1,007,417

PV = ? = \$1,007.417.06 = \$1,007,417

N = 22

I/Y = (1.0825)/(1.0275) -1 = 5.3528%

PMT = \$75,000

FV= 0

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

3. What is the total financing activities during the year?

• (\$19,425)

New Debt Taken – Debt Repayment = Total Financing Activities

2,575 – 22,000 = -\$19,425

4. What is the net cash flow during the year?

• \$40,570

Total Cash Flow – Targeted for retirement = Net Cash Flow

Total Cash Flow = Cash Flow from Operating Activities – Capital Expenditure -+ Financing Activities

Cash Flow from Operating Activities = Income – Discretionary – Nondiscretionary expenses

 Business Income 115,000 Interest Income 1,500 Dividend Income 2,200 Total Income 118,700
 Hobbies 550 Recreational Expenses 5,500 Vacation Expenses 2,500 Total Discretionary 8,550
 Alimony 950 Healthcare Cost 5,250 Clothing Expenses 780 Insurance Cost 6,250 Food Expenses 8,275 Taxes 1,150 Total Nondiscretionary 22,655

Cash Flow from Operating Activities = \$118,700 – \$8,550 – \$22,655 = \$87,495

Total Cash Flow = \$87,495 – \$12,000 - \$19,425 = \$56,070

Net Cash Flow = \$56,070 – \$15,500 = \$40,570

5. What is the total cash flow from operations during the year?

• \$87,495

Cash Flow from Operating Activities = Income – Discretionary – Nondiscretionary expenses

 Business Income 115,000 Interest Income 1,500 Dividend Income 2,200 Total Income 118,700
 Hobbies 550 Recreational Expenses 5,500 Vacation Expenses 2,500 Total Discretionary 8,550
 Alimony 950 Healthcare Cost 5,250 Clothing Expenses 780 Insurance Cost 6,250 Food Expenses 8,275 Taxes 1,150 Total Nondiscretionary 22,655

Cash Flow from Operating Activities = \$118,700 – \$8,550 – \$22,655 = \$87,495

6. 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.

• \$34.01% 7. 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 yearso that Maria can achieve the target? END MODE

• \$7321

FV = \$45,000

N = 6

I/Y = (1.0625)/(1.0175) – 1= 4.4226%

PV = 0

PMT = ? = \$6,712.58

Serial Payment 1 = \$6,712.58*1.0175 = \$6,830.05

Serial Payment 2 = \$6,830.05*1.0175 = \$6,949.58

Serial Payment 3 = \$6,949.58*1.0175 = \$7,071.19

Serial Payment 4 = \$7,071.19*1.0175 = \$7,194.94

Serial Payment 5 = \$7,194.94*1.0175 = \$7,320.85 = \$7,321

Serial Payment 6 = \$7,320.85*1.0175 = \$7,448.96

8. 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 6th yearso that Maria can achieve the target? END MODE

• \$7449

FV = \$45,000

N = 6

I/Y = (1.0625)/(1.0175) – 1= 4.4226%

PV = 0

PMT = ? = \$6,712.58

Serial Payment 1 = \$6,712.58*1.0175 = \$6,830.05

Serial Payment 2 = \$6,830.05*1.0175 = \$6,949.58

Serial Payment 3 = \$6,949.58*1.0175 = \$7,071.19

Serial Payment 4 = \$7,071.19*1.0175 = \$7,194.94

Serial Payment 5 = \$7,194.94*1.0175 = \$7,320.85

Serial Payment 6 = \$7,320.85*1.0175 = \$7,448.96 = \$7,449

9. 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 2nd yearso that Maria can achieve the target? END MODE

• \$6950

FV = \$45,000

N = 6

I/Y = (1.0625)/(1.0175) – 1= 4.4226%

PV = 0

PMT = ? = \$6,712.58

Serial Payment 1 = \$6,712.58*1.0175 = \$6,830.05

Serial Payment 2 = \$6,830.05*1.0175 = \$6,949.58 = \$6,950

Serial Payment 3 = \$6,949.58*1.0175 = \$7,071.19

Serial Payment 4 = \$7,071.19*1.0175 = \$7,194.94

Serial Payment 5 = \$7,194.94*1.0175 = \$7,320.85

Serial Payment 6 = \$7,320.85*1.0175 = \$7,448.96

10. 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 5.75% per year and that both are due at the end of 12 years.

• \$2390

END:

PV = 0

N = 12

I/Y = 5.75%

PMT = \$2500

FV = ? = \$41,564.37

BGN:

PV = 0

N = 12

I/Y = 5.75%

PMT = \$2500

FV = ? = \$43,954.32

\$43,954.32 - \$41,564.37 = \$2,389.95 = \$2,390

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.

11.  What is Dorothy total long term liabilities?

• \$414, 400

(\$24,000 - \$2,700) + (\$300,000 - \$7,000) + (\$9,500 - \$3,700) + (\$97,500 - \$3,200) =

\$21,300 + \$293,000 + \$5,800 + \$94,300 = \$414,400

12.  What is Dorothy total current liabilities?

• \$18,100

\$2,700 + \$7,000 + \$3,700 + \$3,200 + \$1,500 = \$18,100

13. What is Dorothy total liabilities?

• \$432,500

\$414,400 + \$18,100 = \$432,500

14. What is Dorothy net worth?

• \$99,050

Net Worth = Total Assets – Total Liabilites

Total Assets = \$750 + \$2000 + \$34,300 + \$5,500 + \$15,500 + \$350,000 + \$1,500 + \$1000 + \$120,000 + \$1,000 = \$531,550

\$531,550 - \$432,500 = \$99,050

15. Today is your 21stbirthday and your bank account balance is \$25,000. Your account is earning 6.5% interest compounded quarterly. How much will be in the account on your 50th birthday?

• \$162,183

PV = \$25,000

N = 50-21 = 29*4 = 116

I/Y = 6.5/4 = 1.625%

PMT = 0

FV = ? = \$162,182.80 = \$162,183

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 -

16. Compute the Nondiscretionary Cost percentage

• \$27.87%

Nondiscretionary Cost/Total Income = Nondiscretionary Cost percentage

\$28,975/(\$115,000+\$1,500) = .2487 = 24.87%

17. Compute the Emergency Fund Ratio.

• \$5.84

Liquid Assets/Monthly Household Expenses = Emergency Fund Ratio

Liquid Assets = Current assets

Liquid Assets = \$2,500 + \$12,000 + \$3,500 = \$18,000

Monthly Household Expenses = Nondiscretionary + Discretionary Expenses / 12

Monthly Household Expenses = \$28,975 + \$8,000 /12 = \$36,975/12 =\$3,081.25

\$18,000/\$3,081.25 = 5.84%

18. Compute the Current Ratio.

• \$1.04

Current Ratio = Current Assets/Current Liabilities

Current Liabilities = \$9,500 + \$7,800 = \$17,300

Current Ratio = \$18,000/\$17,300 = 1.04%

19. Compute the Gross Savings percentage.

• \$68.26% 20. Compute the Discretionary Cost percentage

• \$6.87%,,

Discretionary Cost / Total Income = Discretionary Cost percentage

\$8,000 / (\$115,000 + \$1,500) = .0687 = 6.87%

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