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BUSI 352 Midterm Assessment solutions complete answers
BUSI 352 Midterm Assessment solutions complete answers
Which of the following stated goals of a client is the most workable for financial planning purposes?
Lori is an assistant to a patent lawyer and earns $40,000. She pays $500 per month on her mortgage, her homeowners insurance is $2,000 per year, her taxes are $2,000 per year, her utilities are $5,000 per year and she pays $4,000 in credit card bills each year. Her housing ratio 1 is equal to 37.5%.
As a visual aid, a balance sheet may be portrayed in three pie charts, one for assets, one for liabilities, and one for net worth.
During their meeting with you, Frankie and Jess call the benefits office to adjust their tax withholding to better suit their financial needs. Identify the stage of the financial planning process in which the planner is engaged.
Which of the following best describes the financial approach that uses quantitative benchmarks that provide guidelines of where a client’s financial profile should be.
Utilizing investment assets to gross pay benchmarks, which of the following individuals is likely on target with their investment assets?
Use the following data: What was the return on assets (ROA) for the year?
Which of the following statements is/are correct? STATEMENT ONE: Property titled Joint Tenants with Rights of Survivorship (JTWROS) can only be owned by married couples. STATEMENT TWO: Property titled Tenants by the Entirety can only be owned by married couples.
Lindsey deposits $1,500 into an account at the beginning of each year. If she earns 5%, compounded annually, how much will the account be worth in 17 years?
Which of the following are premises in Traditional Finance? ONE: Markets are Inefficient. TWO: Investors are Irrational. THREE: Markets are Efficient. FOUR: Investors are Rational.
All of the following statements regarding NPV and IRR are true EXCEPT:
Financial advisers are in positions of trust and must be cautious not to inadvertently misuse their power and refrain from wielding a disproportionate amount of the power in interactions with clients.
Joe has a financial plan prepared by a professional financial planner. What is the order of steps that the planner took? ONE: Establish client goals. TWO: Gather data. THREE: Present recommendations. FOUR: Develop recommendations. FIVE: Analyze client’s financial status. SIX: Implement chosen alternative recommendations. SEVEN: Monitor plan.
Which of the following are heuristics or cognitive biases about which an adviser should be knowledgeable?
John and Mary, both 45 years old, are married and have one child, age 10. They plan to pay for his college at an in-state university from age 18 to 23 and they would like to retire at age 62. They have provided the following financial data. From the goals and data given, which of the following statements is/are correct? (Do not make assumptions that are not stated). STATEMENT ONE: John and Mary’s investment assets to gross pay ratio is adequate for their age. STATEMENT TWO: John and Mary’s savings rate is appropriate for their goals.
Beth earns $100,000 working as a part time lawyer in New Orleans. The company provides a matching contribution to the 401(k) plan of 50% of her contribution up to a maximum matching contribution of 4% of compensation. Her 401(k) plan account had $60,000 in it at the beginning of the year. She contributed $15,000 to the plan this year and the employer made the matching contribution before year-end. The ending balance of the account is $100,000. What is her savings rate this year?
Jeff recently purchased a house for $350,000. He made a down payment of $50,000 and financed the balance over 30 years at 7%. If Jeff ’s first payment is due on March 1st of the current year, how much interest expense will Jeff pay in the current year?
Which of the following statements is/are correct? STATEMENT ONE: Net worth represents the personal equity that the individual has in his assets and can never be less than zero. STATEMENT TWO: If Lisa purchased a car using 30% cash and 70% debt, her net worth would increase by 30%.
Jerry and Jenny are 25 years old and plan on retiring at age 67 and expect to live until age 100. Jenny currently earns $150,000 and they expect to need $150,000 per year in today’s dollars in retirement. Jerry is a stay at home dad. They also expect that Social Security will provide $40,000 of benefits in today’s dollars at age 67. Jenny has been saving $5,000 annually in her 401(k) plan. Their son, Jazz, was just born and is expected to go to college in 18 years. They want to save for Jazz’s college education, which they expect will cost $20,000 in today’s dollars per year and they are willing to fund 5 years of college. They were told that college costs are increasing at 7% per year, while general inflation is 3%. They currently have $100,000 saved in total and they are averaging a 10% rate of return and expect to continue to earn the same return over time. Based on this information, what should they do?
External data might include interest rates, housing trends, and equity market outlook.
Which of the following statements is/are correct? STATEMENT ONE: The Statement of Cash Flows includes monthly recurring cash flows from income and expenses. STATEMENT TWO: The Statement of Net Worth explains changes to net worth between two Statements of Financial Position that are not reported elsewhere on other financial statements.
Which of the following best describes the financial approach that provides a visual representation of how a client distributes resources?
Tony saved enough money to place $125,500 in an investment generating 9.25% compounded monthly. He wants to collect a monthly income of $1,350, at the beginning of each month, for as long as the money lasts. How many months will Tony have this income coming to him?
Financial counselors or advisers must establish and maintain the adviser-client relationship based on their ability to:
Use the following data to answer the questions. Based on the information below, calculate Pat and Marie’s emergency fund ratio in months.
Brandon buys a piece of equipment for $15,000. He pays $5,000 for upgrades in year 1 and the equipment generates $2,000 in cash flow for year 1. In year 2 the equipment generates $8,000, year 3 it generates $4,000, but Brandon sells it for $6,000 but also pays a $500 commission. Brandon’s required rate of return is 8%. What is the NPV?
Samantha has the following transactions: - She purchases $5,000 worth of a mutual fund with cash from her savings account. - She spends $6,000 on a vacation with cash from her money market account. - She spends $10,000 on new furniture and uses her credit card to make the purchase. What is the combined impact of these transactions on her net worth?
Which of the following best completes this sentence: There has been a movement in recent times for the financial industry to be more in touch with _____________ due to their effect and persuasiveness in financial matters? ONE: Capital Asset pricing. TWO: Beta. THREE: Psychology and sociology.
Which of the following statements is/are correct? STATEMENT ONE: The emergency fund ratio metric should be 3 to 6 months of non-discretionary cash flows. STATEMENT TWO: When calculating the savings rate for a family, any contributions to retirement made by the employer should be included.
Use the following data to answer the questions. Based on the information below, calculate Pat and Marie’s savings rate:
William owns 1 share of Park stock. He purchased the stock three years ago for $17.50. The stock is currently trading for $40 per share. The stock has paid the following dividends over the past three years. - Year 1: $1.00. - Year 2: $2.00. - Year 3: $3.00.
What is the compounded rate of return (IRR) that William has earned on this investment?
It is very important that assumptions are not used in the financial planning process. The planner must only used facts.
Julie purchased a new vehicle for $40,000. She put $5,000 down and financed the $35,000 balance over 5 years. What is the impact of this transaction on her net worth?
Which of the following statements is/are correct? STATEMENT ONE: The principal but not the interest to be paid this year on a 30-year mortgage is properly classified on the Statement of Financial Position as a current liability. STATEMENT TWO: A CD with a maturity of 9-months is classified as an investment asset on the Statement of Financial Position.
Which of the following is incorrect regarding the Humanistic Paradigm?
Use the following data to answer the questions. Based on the information below, calculate Pat and Marie’s housing ratio 1 in numbers.
Use the following data to answer the question. What was Mike’s return on net worth for the year?
Which of the following is most likely to affect a rational investor, as described in Traditional Finance?
Which of the following would NOT be considered an investment asset?
Communication is the key factor in the financial adviser-client relationship.
Which of the following is / are correct? STATEMENT ONE: The IRR is the discount rate which equates the present value of an investment's expected costs to the present value of the expected cash inflows. STATEMENT TWO: An investment with a negative NPV should be accepted because it is saving the client money.
Use the following data to answer the question. What is Tracy and Brett’s current ratio?
Hyrum is currently age 35. He has $10,000 of savings and a salary of $65,000. He has an appropriate amount of savings based on the investment assets to gross pay benchmark.
During your meeting with your client, Charles Mudge, you recommended he purchase a personal liability umbrella policy (PLUP). Which part of the financial planning process were you engaged in?
Which of the following is not considered a critical element of an engagement letter?
Use the following data to answer the question. What is Mike’s ROI for the year?
Kevin owns one share of Acme, Inc. stock. He purchased the stock three years ago for $25. The stock is currently trading for $29.50 per share. The stock has paid the following dividends over the past three years. - Year 1: $1.50 - Year 2: $2.00 - Year 3: $2.50
What is the compounded rate of return (IRR) that Kevin has earned on this investment?
For valuation purposes, balance sheet liabilities should be recorded at their:
Mike earns an annual salary of $50,000. His company matches 50% of his 401(k) contributions up to 6% of his compensation (max 3% company contribution). Mike contributed $5,000 to the plan this year and his company made the matching contribution before the end of the year. The balance of his account at year’s end was $95,000. What is his savings rate this year?
Most clients have a good understanding of the objective factors that affect the financial climate; and a planner’s most important function is finding out what the client’s subjective wishes are.
Tracy purchased a car for $19,500. She is financing the purchase at an 11% annual interest rate, compounded monthly for 3 years. What is the payment that Tracy is required to make at the end of each month?
The benefits that accrue to a client from using a financial planner to prepare a financial plan include all the following except:
Judy recently purchased her first home for $220,000. She made a down payment of $20,000, and financed the balance over 15 years, at 6% interest. If Judy’s first payment is due on October 1 of this year, approximately how much of this year’s payments will be applied to the outstanding principal?
The three-panel approach includes all of the following except:
Five years ago today, Alex purchased a stock for $45. Over the past five years, the stock has paid the following dividends: $1.25 (year 1), $2.00 (year 2), $2.50 (year 3), $3.25 (year 4), $1.75 (year 5). At the end of the fifth year, the stock is selling for $47. What was Alex’s compounded rate of return (IRR)?
A client in the asset accumulation phase is characterized by:
Evaluating your client’s emergency fund will fall into which of the following panels of the Three-Panel Approach?
Which of the following is probably the start of a closed question?
Seven years ago, Stan purchased 10 shares of an aggressive growth mutual fund at $90 per share, for a total of $900. Today he sold all 10 shares for $4,500. What was his average annual rate of return on this investment, before tax?
Use the following data to answer the question. Assume for this question only that Tracy and Brett’s monthly housing costs (P&I&T&I) are $1,500. Which of the following lender thresholds will Tracy and Brett meet?
Which of the following ratios is not used in a typical financial statement approach?
Hannah has decided to save for a vacation in 18 months. She will save the money into a short-term investment account returning 4% annually. How much will she have to put away at the beginning of each month if the vacation cost is $15,000? (Round to the nearest dollar.)
If your financial planning client uses phrases like: “see what I mean” or “imagine that,” your client’s learning style is most likely…
The present value approach is helpful in discussions with clients as it provides an annual savings requirement that can be compared to current savings and takes into consideration all future cash flow goals.
According to the cash flow approach, each of the following recommendations will have a positive cash flow impact except:
Judy recently purchased her first home for $220,000. She made a down payment of $20,000, and financed the balance over 15 years, at 6% interest. If Judy’s first payment is due on October 1 of this year, approximately how much interest will she pay in this year?
Holly is considering purchasing a new car for $30,000. The dealer is offering two mutually exclusive options on the purchase: - Option 1: Receive a $4,000 rebate on the price of the car and finance the balance over 5 years at 4% interest, or - Option 2: Finance the vehicle for 7 years at 0% interest with no rebate. Which of the following options should Holly select if her goal is to minimize the total amount she pays for the car?
The implementation phase is where change really occurs but may require the use of other professionals other than the financial planner.
Jason received a check for $50,000 today. This was from an investment made 10 years ago. The investment earned 8% compounded quarterly. How much was his original investment?
Which of the following is most likely the beginning of a closed question?
The present value approach takes each short, intermediate, and long-term goal, determines each individual present value, then sums these present values together and then reduces them by current resources (investment assets and cash and cash equivalents) and then treats the net PV as an obligation to be retired over the remaining life expectancy at a discount rate equal to the expected portfolio rate of return.
One of the advantages of a professional financial planner is his or her expertise and their objectivity.
Yao has an investment account with a balance of $125,000. She intends to make withdrawals each year for the next 15 years from this account. If the investment account earns 10%, compounded annually, how much can Yao receive at the end of each year?
Which of the following do NOT apply to the use of questionnaires?
All of the following are principles of Modern Portfolio Theory EXCEPT:
This school of thought suggests that humans are subject to the same learning principles that were established in animal research.
Fred and Louise are 38 years old and plan on retiring at age 67 and expect to live until age 95. Fred currently earns $150,000 and they expect to need $100,000 in retirement. Louise is a stay at home mom. They also expect that Social Security will provide $30,000 of benefits in today’s dollars at age 67. He has been saving $17,000 annually in his 401(k) plan. Their daughter, Ann, who was just born, is expected to go to college in 18 years. They want to save for Ann’s college education, which they expect will cost $20,000 in today’s dollars per year and they are willing to fund 5 years of college. They were told that college costs are increasing at 7% per year, while general inflation is 3%. They currently have $400,000 saved in total and they are averaging a 7% rate of return and expect to continue to earn the same return over time. Based on this information, what should they do?
A rational investor would be considered to be indifferent or uncaring if a profit is realized by a dividend declared by a company versus if the same profit is realized by selling the stock at a gain.
The rational investor is deemed to know that when a stock value goes down, even though a sale is not made, the value is lost.
Behavioral Finance rejects Traditional Finance’s views or methods.
Intrinsic values, in an efficient market, are determined by an analysis of expected cash flows and of the risk of those cash flows along with investor heuristics and tendencies.
The movements of the client’s body mostly do not indicate thoughts or emotions of the client.
Financial advisors are in positions of trust and must be cautious not to inadvertently misuse their power and refrain from wielding a disproportionate amount of the power in interactions with clients.
Communication is the key factor in the financial advisor-client relationship.
Financial advisors must respect the client’s position, hold the client’s interest above that of the advisor, and try to communicate effectively to realize the client’s goals and achieve the desired result.
Which of the following is not one of the potential needs identified in client lifecycle profiles?
Use the following data to answer the question. What is Mike’s ROI for last year?
Robin is looking to buy a condo in 5 years for $300,000 in today’s dollars. She can earn an 8% return on her investments and she expects inflation to be 2.5%. What serial payment should Robin make at the end of the first year?
Which of the following are NOT consistent with the Humanistic Paradigm?
After generating financial statements for your client, Chuck, you list each line item on the income statement as a percentage of total income and each item on the balance sheet as a percentage of total assets. Which comparative financial statement tool are you utilizing?
Mitt was injured by a bus called “Move Forward.” He won a lawsuit and will receive $10,000 per month, at the beginning of each month, for the next 10 years. How much must “Move Forward” deposit into an account earning 5%, compounded monthly, to satisfy this judgment?
Which of the following statements are consistent with the Developmental Paradigm? ONE: The majority of humanistic theories view clients as experts on themselves. TWO: Much of the Developmental approach has its origin in and was influenced by Freudian psychoanalytic theory. THREE: Counseling in the Developmental Paradigm has an overall aspiration to recount or correct earlier, disrupted development to foster change in the client or the client’s behavior.
Which of the following does not describe “anchoring?”
Colin is trying to decide whether he should make his IRA contribution at the beginning of the year or at the end of the year. He wants to save $5,000 per year for 25 years in his IRA that can earn 7% per year. What would be the difference in his account value if he made the payments at the beginning of each year rather than at the end?
Once the implementation of the financial plan is completed, the engagement is over and there are no further steps.
This school of thought has its origin in and was influenced by Freudian psychoanalytic theory.
The present value approach takes each short, intermediate, and long-term goal, determines each individual present value, then sums these present values together and then reduces them by current resources (investment assets and cash and cash equivalents) and then treats the net PV as an obligation to be retired over the remaining work life expectancy at a discount rate equal to the expected portfolio rate of return.
All of the following are examples of qualitative information that should be collected by the financial planner EXCEPT:
Which of the following approaches provides the planner and client with a methodology in order to reach goals? The methodology is expressed as cover the risk and save and invest.
External data collected in Step 1 of the financial planning process includes all of the following except:
Ted has been dollar cost averaging in a mutual fund by investing $1,500 at the beginning of every quarter for the past 5 years. He has been earning an average annual compound return of 9% compounded quarterly on this investment. How much is the fund worth today?
Which of the following is the formula to calculate Net Discretionary Cash Flow (NDCF)?
Traditional Finance slowed down market analysis and hampered investors and those participating in the market at a time when some may have been intimidated by or felt ignorant of available market information or financial data.
Behavioral investors have been characterized as those who tend to choose portfolios by evaluation and decisions based on expected wealth, desire for security, aspiration levels, and probabilities of aspiration levels.
Cheyenne invests $20,000 in a limited partnership today. At the end of each years 1 through 5, she will receive the after-tax cash flows shown below. The partnership will be liquidated at the end of the fifth year. Cheyenne is in the 35% federal income bracket. The after-tax IRR on this investment is:
Which of the following is consistent with the Disposition Effect?
Rob has just received a check for $32,595. This is a return from an investment that he made 18 years ago. He was told that the return was the equivalent of 11% per year. How much was his original investment?
Use the following data to answer the question. What is Tracy and Brett’s emergency fund ratio in months?
Brandon buys a piece of equipment for $15,000. He pays $5,000 for upgrades in year 1 and the equipment generates $2,000 in cash flow for year 1. In year 2 the equipment generates $8,000, year 3 it generates $4,000, but Brandon sells it for $6,000 but also pays a $500 commission. What is his IRR?
Which of the following is usually included in an engagement letter?
Anthony has been investing $1,000 at the end of each year for the past 15 years. How much has accumulated assuming he has earned 10.5% compounded annually on his investment?
Robin is looking to buy a condo in 5 years for $300,000 in today’s dollars. She can earn an 8% return on her investments and she expects inflation to be 2.5%. What serial payment should Robin make at the end of the second year?
Which of the following options best completes this sentence: “In the event that a client is trying to communicate a message that is not clear, then the adviser will want to …”
David won the lottery. He can take a single lump sum payout of $10 million dollars or receive $750,000 per year for the next 25 years. What rate of return would David need to break even if he took the lump sum amount instead of the annuity?
Financial advisers must respect the client’s position, hold the client’s interest above that of the adviser, and try to communicate effectively to realize the client’s goals and achieve the desired result.
As a financial advisor, what will you tell your client, Ryan, he should be willing to pay for an investment property that he plans to buy today and hold for 5 years and then sell, given the following cash flows and the fact that he expects 11% on any investment he makes?
An example of internal data is…
Lori wants to give her daughter $25,000 in 8 years to start her own business. How much should Lori invest today, at an annual interest rate of 8%, compounded annually, to have $25,000 in 8 years?
Billy owns one share of Disney stock. He purchased the share 3 years ago for $15. Disney stock is currently trading for $25 per share. The stock has paid the following dividends over the past three years: year 1, $1.00; year 2, $2.00; year 3, $3.00.
What is the compounded rate of return (IRR) that Billy has earned on his investment?
The first two steps in the financial planning process are:
Use the following data to answer the questions. Based on the information below, calculate Pat and Marie’s housing ratio 2.
Calculate the IRR of a machine that is purchased for $5,000, sold at the end of year 4 for $2,500, and produces the following cash flows: - Year 1: $700. - Year 2: $800. - Year 3: $900. - Year 4:$1,000.
Michael has been dollar cost averaging in a mutual fund by investing $2,000 at the beginning of every quarter for the past 7 years. He earns an average annual compound return of 11% on this investment, compounded quarterly. How much is the fund worth today?
Which one of the following statements is wrong?
Which of the following is/are incorrect regarding the Humanistic Paradigm?
Quantitative information that is gathered in the data gathering process might include banking and investment information, tax information, financial statements and attitudes regarding risk tolerance and charitable funding.
Which of the following are premises in Traditional Finance?
You have been working with your client, Alex, for about 4 months. So far, you have developed a mission statement, goals, and objectives with Alex. You are now using Alex’s mission statement to construct a plan. Which approach to financial planning are you utilizing?
Which of the following is not necessary to identify a client’s life cycle position?
What is one of the primary differences between a Coverdell Education Savings Account and 529 Savings Plan?
A savings rate between 10 and 13 percent of one’s gross pay is almost always sufficient to meet most financial goals.
Which of the following is most likely not classified as an investment amount on the Statement of Financial Position?
Which of the following theories or equations govern the premises of Traditional Finance:
1- Bottom Line Theory.
2- Prospect Theory.
3- The Behavioral Asset Pricing Model.
Susan’s annual salary is $80,000. She contributes 10% of her salary to her 401(k) plan; and her employer contributes 5% of her salary to a profit sharing plan. She also contributes $2,500 per year to an IRA. What is Susan’s approximate savings rate?
All of the following statements are true, except:
Jill would like to plan for her son’s college education. She would like for her son, who was born today, to attend college for 5 years, beginning at age 18. Tuition is currently $12,000 per year and tuition inflation is 6%. Jill can earn an after-tax rate of return of 8%. How much must Jill save at the end of each year, if she wants to make the last payment at the beginning of her son’s first year of college?
All of the following statements concerning educational fund 529 Savings Plans are correct EXCEPT:
An engagement letter is a quasi-legal agreement between a professional or professional organization and a client.
Mrs. Escovido has come to you for advice on financing her son’s college education at a state university. Even though her income exceeds $200,000, she has not saved enough for his college expenses. You advise her that her best opportunity to acquire education funds would be through:
The future value of a lump sum amount is:
Frank and Stephanie have an 18-year-old son who is going to college this year for four years. The tuition is $15,000 per year and is expected to increase at 4% per year. They believe they can earn 6% per year on their investment; what lump-sum amount must they deposit today to pay for their son’s education?
The estimated value of a real estate asset in a financial statement should be based upon the:
Which of the following is / are correct?
1- The IRR is the discount rate which equates the present value of an investment’s expected costs to the present value of the expected cash inflows.
2- If the cost of capital for this investment is 9%, the investment should be rejected because its net present value will be negative.
“The present value of an ordinary annuity except that the payment is made at the beginning of the period” is the definition of which of the following:
Which one of the following statements is wrong?
Brian’s financial planner is preparing his balance sheet. Which of the following would be considered an “investment asset?”
Risk tolerance and asset allocation are a separate issue from retirement planning and are not required to be integrated into a retirement plan.
Financial counselors or advisors must establish and maintain the advisor-client relationship based on their ability to:
Which of the following is inconsistent with respect to the gambler’s fallacy?
Emily is considering purchasing a new home for $400,000. She intends to put 20% down and finance $320,000 but is unsure which financing option to select. Emily is considering the following options: - Option 1: Fixed rate mortgage over 30 years at 6% interest, zero points, or - Option 2: Fixed rate mortgage over 30 years at 4% interest, plus two discount points. How long would her financial planner recommend that she live in the house to break even using Option 2 presuming she is not financing the points?
Betty earns $100,000 working as a part time lawyer in New Orleans. The company provides a matching contribution in the 401(k) plan of 50% up to a maximum contribution of 4% of compensation. Her 401(k) plan account had $60,000 in it at the beginning of the year. She contributed $15,000 to the plan this year and the employer made the matching contribution before year-end. The ending balance of the account is $100,000. What is her return on investments this year?
Which of the following is not considered to be in line with the Developmental paradigm or school of thought?
Which of the following statements, if any, is (are) correct?
1- Prepaid Tuition plans provide for the prepayment of college tuition at current tuition prices for future enrollment.
2- A disadvantage of a QTP (qualified tuition plan) is that the owner / contributor must relinquish control of the account, and share control of the funds with the student / beneficiary.
All of the following statements concerning educational funding are correct EXCEPT:
A Coverdell Education Savings Account (ESA) is a tax deferred trust or custodial account established to pay for higher education or qualified elementary/secondary school expenses.
What is one of the primary differences between a Coverdell ESA and a 529 Savings Plan?
Which of the following best describes Behavioral Finance?
According to the cash flow approach, all of the following recommendations will have a positive impact to cash flow except:
Calculate the NPV of a machine that is purchased for $5,000, sold at the end of year 4 for $2,500, and produces the following cash flows:
Year 1: $700
Year 2: $800
Year 3: $900
Year 4: $1,000
Assuming that the appropriate discount rate is 6%, what is the NPV?
One of the most reported interruptions or disruptions in passive listening is when:
Your client invested $10,000 in an interest bearing promissory note earning an 11% annual rate of interest, compounded monthly. How much will the note be worth at the end of 7 years, assuming that all interest is reinvested at the 11% rate?
Which of the following is not a method used to determine the Expected Family Contribution (EFC) for financial aide?
Proper and practical communication skills and techniques in financial counseling can aid the financial planning advisor to understand:
In what order should the steps in the financial planning process occur?
1- Gathering client data.
2- Establishing and defining the planner / client relationship.
3- Developing and presenting financial plan recommendations.
4- Analyzing and evaluating client’s financial status.
5- Monitoring the plan.
6- Implementing financial plan recommendations.
Alberto saved enough tip money from working at the casino to place $125,500 in an investment account generating 9.25% compounded monthly. He wants to collect a monthly income of $1,350 at the beginning of each month for as long as the money lasts. Approximately how many months will Alberto have this income coming to him?
Judy recently purchased her first home for $220,000. She made a down payment of $20,000, and financed the balance over 15 years, at 6% interest. If Judy’s first payment is due on October 1 of this year, approximately how much interest will she pay in this year?
The three panel approach includes all of the following except:
Which of the following statements is/are correct?
1- Net worth represents the personal equity that the individual has in his assets and can never beless than zero.
2- If Lisa purchased a car using 30% cash and 70% debt, her net worth would increase by 30%.
The Keller’s discovered that they could reduce their mortgage interest rate from 10% to 4%. The value of homes in their neighborhood has been increasing at the rate of 5% annually. If the Keller’s were to refinance their house with $3,000 in closing costs added to their current mortgage balance ($277,000) over a period of time which coincides with their chosen retirement age in 20 years, what would be their new monthly payment including principal and interest?
Colleen’s grandfather set up a savings account for her with a $25,000 gift when she was first born. The account accumulated interest annually at a rate of 6% per year, and no other deposits were made to the account. Colleen is 21 years old today. To date, how much has accumulated in Colleen’s account?
The Lifetime Learning Credit provides a tax deduction of up to $2,000 (2105) per family for an unlimited number of years for postsecondary education.
All of the following statements concerning educational funding are correct EXCEPT:
Which of the following are true about “why” questions?
1- “Why” questions are always the best questions to ask.
2- While the “why” questions are tempting and may help understand the client’s motives, the “why” question may be ill-advised because it could have limited benefit for the client.
3- A “why” question could place the client in a position of having to justify what was done, and that could put the client in a defensive posture.
Byron and Mandy are married and have a net worth of $20,000 and total assets of $150,000. If their revolving credit and unpaid bills total $8,000, how much are their total liabilities?
Judy recently purchased her first home for $220,000. She made a down payment of $20,000, and financed the balance over 15 years, at 6% interest. If Judy’s first payment is due on October 1 of this year, approximately how much of this year’s payments will be applied to the outstanding principal?
Which step in the financial planning process comes before monitoring?
Which of the following statements, if any, is (are) correct?
1- Aside from risk tolerance, the time horizon is one of the most important factors to consider when deciding in which securities to invest, and how much and when to invest.
2- QTPs generally require a decrease in the risk level of investments, the closer the student / beneficiary gets to the beginning of college.
What is the total American Opportunity & Lifetime tax credit the Jones family can take, given the following information?
Sally is a sophomore and incurs $5,000 in education expenses.
Tommy is in grad school and incurs $7,000 in education expenses.
Mom, who has a 4 year degree, goes back to school and incurs $4,000 in education expenses.
Holly’s salary is $120,000 per year. She contributes 12% of her salary to her 401(k) plan. Her employer matches with 5% of her salary to a 401(k) plan. She also contributes $2,500 per year to an IRA. Holly’s annual savings rate is?
Which of the following is most likely not classified as an investment amount on the Statement of Financial Position?
Joe has a financial plan prepared by a professional financial planner. What is the order of steps that the planner took?
1- Establish client goals.
2- Gather data.
3- Define relationship.
4- Develop and present alternatives.
5- Analyze client’s financial status.
6- Implement chosen alternative recommendations.
7- Monitor plan.
Which of the following factors is critical in determining the appropriate benchmark for the investment assets to gross pay ratio?
Bob and his wife Sally recently opened an investment account with the intention of saving enough to purchase the house of their dreams. Their goal is to have $45,000 down in 5 years. Their account will guarantee them a return of 8% compounded annually. How much do they need to put into the account right now to reach their objective?
To obtain a loan, either the housing ratio 1 or the housing ratio 2 must be okay, not both.
The balance sheet equation is:
What is one of the primary differences between a Coverdell ESA and a 529 Savings Plan?
With the life cycle approach, a client can only be in one of the three phases at a specific time.
The three panel approach includes all of the following except:
Which of the following are repayment options for a Stafford Loan?
Which of the following is true?
All of the following are true regarding EE Savings Bonds used for education expenses except?
John and Mary, both 45 years old, are married and have one child, age 10. They plan to pay for his college at an in-state university from age 18 to 23 and they would like to retire at age 62. They have provided the following financial data.
From the goals and data given, which of the following statements is/are correct? (Do not make assumptions that are not stated)
1- John and Mary’s investment assets to gross pay ratio is adequate for their age.
2- John and Mary’s savings rate is appropriate for their goals.
Claire just won the lottery and has been told that she can either accept annual payments at the beginning of each year of $173,695 per year for the next 20 years or she can receive a lump-sum settlement. Claire figures she could invest the money at 6.34% (the same rate as the annuity). What would the amount of the lump-sum settlement be?
All of the following statements regarding NPV are true EXCEPT:
Brian’s financial planner is preparing his balance sheet. Which of the following would be considered an “investment asset?”
You have been working with your client, Alex, for about 4 months. So far, you have developed a mission statement, goals, and objectives with Alex. You are now using Alex’s mission statement to construct a plan. Which approach to financial planning are you utilizing?
Emily is considering purchasing a new home for $400,000. She intends to put 20% down and finance $320,000, but is unsure which financing option to select. Emily is considering the following options:
Option 1: Fixed rate mortgage over 30 years at 6% interest, zero points, or
Option 2: Fixed rate mortgage over 30 years at 4% interest, plus two discount points.
How long would her financial planner recommend that she live in the house to break even using Option 2 presuming she is not financing the points?
The student loan interest deduction is not an above the line deduction.
Colleen’s grandfather set up a savings account for her with a $25,000 gift when she was first born. The account accumulated interest annually at a rate of 6% per year, and no other deposits were made to the account. Colleen is 21 years old today. To date, how much has accumulated in Colleen’s account?
Which of the following statements is/are correct?
1- The Statement of Cash Flows includes monthly recurring cash flows from income and expenses.
2- The Statement of Net Worth explains changes to net worth between two Statements of Financial Position that are not reported elsewhere on other financial statements.
Byron and Mandy are married and have a net worth of $20,000 and total assets of $150,000. If their revolving credit and unpaid bills total $8,000, how much are their total liabilities?
External data collected in phase 2 of the financial planning process includes all of the following except:
Quantitative information that is gathered in the data gathering process might include banking and investment information, tax information, financial statements and attitudes regarding risk tolerance and charitable funding.
In what order should the steps in the financial planning process occur?
1- Gathering client data.
2- Establishing and defining the planner / client relationship.
3- Developing and presenting financial plan recommendations.
4- Analyzing and evaluating client’s financial status.
5- Monitoring the plan.
6- Implementing financial plan recommendations.
Which of the following are true about “why” questions?
1- “Why” questions are always the best questions to ask.
2- While the “why” questions are tempting and may help understand the client’s motives, the “why” question may be ill-advised because it could have limited benefit for the client.
3- A “why” question could place the client in a position of having to justify what was done, and that could put the client in a defensive posture.
Lindsey and Charles are 35 years old; they plan on retiring at age 63 and expect to live until age 96. They currently earn $245,000 and expect to need $195,000 in retirement. They also expect that Social Security will provide $40,000 of benefits in today’s dollars at age 63. They are saving $15,000 each in their 401(k) plans and just had a baby boy they named Timothy James or TJ for short. They want to save for TJ’s college education, which they expect will cost $20,000 in today’s dollars, and they are willing to fund 4 years of college. They were told that college costs are increasing at 7% per year, while general inflation is 3%. They currently have $150,000 saved in each of their 401(k) plans, and they are averaging a 9% rate of return and expect to continue to earn the same return over time. Based on this information, what should they do?
Frank is 60 years old. He plans to retire in seven years. He has amassed a net worth of $1,250,000 which he expects will sustain him during retirement. He is divorced with one adult independent child. Which phase of the life cycle is Curtis most likely in?
Six months ago, Joe purchased a new dining room table for $6,500. In preparing accurate personal financial statements, this purchase would appear as a(n):
1- Use assets on the client’s balance sheet.
2- Investment assets on the client’s balance sheet.
3- Variable outflow on the client’s cash flow statement.
4- Fixed outflow on the client’s cash flow statement.
Ronald bought the following assets this year. Which of these purchases would be considered “bad debt?”
“The present value of an ordinary annuity except that the payment is made at the beginning of the period” is the definition of which of the following:
The account balance method of education funding uses real dollars and the annuity due funding plan to calculate the present value of the cost of education.
Mrs. Escovido has come to you for advice on financing her son’s college education at a state university. Even though her income exceeds $200,000, she has not saved enough for his college expenses. You advise her that her best opportunity to acquire education funds would be through:
Stephanie wants to save for her daughter’s education. Tuition costs $10,000 per year in today’s dollars. Her daughter was born today and will go to school starting at age 18. She will go to school for 4 years. Stephanie can earn 12% on her investments and tuition inflation is 6%. How much must Stephanie save at the end of each year if she wants to make her last savings payment at the beginning of her daughter’s first year of college?
Which of the following is incorrect with respect to heuristics in the realm of financial advice?
One of the most reported interruptions or disruptions in passive listening is when:
Betty earns $100,000 working as a part time lawyer in New Orleans. The company provides a matching contribution in the 401(k) plan of 50% up to a maximum contribution of 4% of compensation. Her 401(k) plan account had $60,000 in it at the beginning of the year. She contributed $15,000 to the plan this year and the employer made the matching contribution before year-end. The ending balance of the account is $100,000. What is her return on investments this year?
Jill would like to plan for her son’s college education. She would like for her son, who was born today, to attend college for 5 years, beginning at age 18. Tuition is currently $12,000 per year and tuition inflation is 6%. Jill can earn an after-tax rate of return of 8%. How much must Jill save at the end of each year, if she wants to make the last payment at the beginning of her son’s first year of college?
Which of the following statements is/are correct?
1- The emergency fund ratio metric should be 3 to 6 months of non-discretionary cash flows.
2- When calculating the savings rate for a family, any contributions to retirement made by the employer should be included.
Which of the following statements is/are correct?
1- The principal but not the interest to be paid this year on a 30-year mortgage is properly classified on the Statement of Financial Position as a current liability.
2- A CD with a maturity of 9-months is classified as an investment asset on the Statement of Financial Position.
All of the following statements concerning educational funding is correct EXCEPT:
The benefits that accrue to a client from using a financial planner to prepare a financial plan include all of the following except:
Mrs. Escovido has come to you for advice on financing her son’s college education at a state university. Even though her income exceeds $200,000, she has not saved enough for his college expenses. You advise her that her best opportunity to acquire education funds would be through:
William owns 1 share of Park stock. He purchased the stock three years ago for $17.50. The stock is currently trading for $40 per share. The stock has paid the following dividends over the past three years.
Year 1: $1.00.
Year 2: $2.00.
Year 3: $3.00.
What is the compounded rate of return (IRR) that William has earned on this investment?
All of the following are true regarding EE Savings Bonds used for education expenses except?
John and Mary, both 45 years old, are married and have one child, age 10. They plan to pay for his college at an in-state university from age 18 to 23 and they would like to retire at age 62. They have provided the following financial data.
From the goals and data given, which of the following statements is/are correct? (Do not make assumptions that are not stated)
1- John and Mary’s investment assets to gross pay ratio is adequate for their age.
2- John and Mary’s savings rate is appropriate for their goals.
Susan’s annual salary is $80,000. She contributes 10% of her salary to her 401(k) plan; and her employer contributes 5% of her salary to a profit sharing plan. She also contributes $2,500 per year to an IRA. What is Susan’s approximate savings rate?
Beth earns $100,000 working as a part time lawyer in New Orleans. The company provides a matching contribution to the 401(k) plan of 50% of her contribution up to a maximum contribution of 4% of compensation. Her 401(k) plan account had $60,000 in it at the beginning of the year. She contributed $15,000 to the plan this year and the employer made the matching contribution before year-end. The ending balance of the account is $100,000. What is her savings rate this year?
Your client invested $10,000 in an interest bearing promissory note earning an 11% annual rate of interest, compounded monthly. How much will the note be worth at the end of 7 years, assuming that all interest is reinvested at the 11% rate?
Emily is considering purchasing a new home for $400,000. She intends to put 20% down and finance $320,000, but is unsure which financing option to select. Emily is considering the following options:
Option 1: Fixed rate mortgage over 30 years at 6% interest, zero points, or
Option 2: Fixed rate mortgage over 30 years at 4% interest, plus two discount points.
How long would her financial planner recommend that she live in the house to break even using Option 2 presuming she is not financing the points?
Which of the following theories or equations govern the premises of Traditional Finance:
1- Bottom Line Theory.
2- Prospect Theory.
3- The Behavioral Asset Pricing Model.
Which of the following are consistent with the Cognitive-Behavioral school of thought?
All of the following statements regarding NPV are true EXCEPT:
A Coverdell Education Savings Account (ESA) is a tax deferred trust or custodial account established to pay for higher education or qualified elementary/secondary school expenses.
Certain heuristics or cognitive biases can lead to less than optimal decisions by a normal investor. Which of the following is NOT discussed in the textbook?
Holly would like to plan for her daughter’s college education. She would like for her daughter, who was born today, to attend college for 4 years, beginning at age 18. Tuition is currently $10,000 per year and tuition inflation is 7%. Holly can earn an after-tax rate of return of 10%. How much must Holly save at the end of each year, if she wants to make the last payment at the beginning of her daughter’s first year of college?
All of the following statements concerning educational funding is correct EXCEPT:
If your financial planning client talks about situations, expresses emotions verbally, enjoys listening (but cannot wait to talk), and tends to move lips or sub-vocalize when reading, then, their learning style is most likely?
Financial counselors or advisors must establish and maintain the advisor-client relationship based on their ability to:
One of the most reported interruptions or disruptions in passive listening is when:
Based on the data from the Bureau of Labor Statistics, there are more than 1 million financial planners.
The implementation phase is where change really occurs, but may require the use of other professionals other than the financial planner.
All of the following statements are true, except:
Which of the following statements is/are correct?
1- Property titled Joint Tenants with Rights of Survivorship (JTWROS) can only be owned by married couples.
2- Property titled Tenants by the Entirety can only be owned by married couples.
Which of the following are premises in Traditional Finance?
According to the cash flow approach, all of the following recommendations will have a positive impact to cash flow except:
“The present value of an ordinary annuity except that the payment is made at the beginning of the period” is the definition of which of the following:
Claire just won the lottery and has been told that she can either accept annual payments at the beginning of each year of $173,695 per year for the next 20 years or she can receive a lump-sum settlement. Claire figures she could invest the money at 6.34% (the same rate as the annuity). What would the amount of the lump-sum settlement be?
Which of the following is/are incorrect regarding the Humanistic Paradigm?
Michael has been dollar cost averaging in a mutual fund by investing $2,000 at the beginning of every quarter for the past 7 years. He earns an average annual compound return of 11% on this investment, compounded quarterly. How much is the fund worth today?
One of the nice features of the pie chart approach is that it is very useful in depicting a client’s current
information and proposed changes.
The balance sheet equation is:
With the life cycle approach, a client can only be in one of the three phases at a specific time.
Risk tolerance and asset allocation are a separate issue from retirement planning and are not required to be integrated into a retirement plan.
Bob and his wife Sally recently opened an investment account with the intention of saving enough to purchase the house of their dreams. Their goal is to have $45,000 down in 5 years. Their account will guarantee them a return of 8% compounded annually. How much do they need to put into the account right now to reach their objective?
Samantha has the following transactions:
She purchases $5,000 worth of a mutual fund with cash from her savings account.
She spends $6,000 on a vacation with cash from her money market account
She spends $10,000 on new furniture, and uses her credit card to make the purchase.
What is the combined impact of these transactions on her net worth?
External data might include interest rates, housing trends, equity market outlook.
Which of the following are repayment options for a Stafford Loan?
An example of internal data is?
Proper and practical communication skills and techniques in financial counseling can aid the financial planning advisor to understand:
The student loan interest deduction is not an above the line deduction.
Which of the following is not one of the five general categories that make up a client’s internal data?
