FIN4320 Exam 1
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 21^{st}birthday 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 50^{th} 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%