Personal Finance Today

11 Jun Personal Finance Today

Lesson Four Homework

Chapter 9: Problem and Activities

#3, #4

3: Joetta Hernandez is a single parent with two children and earns $45,000 a year. Her employer’s group life insurance policy would pay 2.5 times her salary. She also has $60,000 saved in a 401(k) plan, $5,000 in mutual funds, and a $3,000 CD. She wants to purchase term life insurance for 15 years, until her youngest child is self-supporting. She is not concerned about her outstanding mortgage, as the children would live with her sister in the event of Joetta’s death. Assuming she can receive a 3 percent after-tax, after-inflation return on insurance proceeds, use the earnings multiple method to calculate her insurance need. How much more insurance does Joetta need to buy? What other information would you need to know to use the needs approach to calculate Joetta’s insurance coverage?

4: Virgil Cronk wants to purchase a life insurance policy that will allow him to increase his future coverage without having to take another medical exam. Virgil’s family has a history of cardiac problems. Name at least two policy riders that he should consider adding to his policy.

5: The Baulding family has a basic health insurance plan that pays 80 percent of out-of-hospital expenses after a deductible of $250 per person. If three family members have doctor and prescription drug expenses of $980, $1,840, and $220, respectively, how much will the Baulding family and the insurance company each pay? How could they benefit from a flexible spending account established through Mr. Baulding’s employer? What are the advantages and disadvantages of establishing such an account?

Chapter 10: Problem and Activites

#1, #2

1. Jody Solan currently insures her home for 100 percent of its replacement value with an HO-3 policy. For Jody, this works out to $140,000 in dwelling (Part A) coverage. What are the maximum dollar coverage amounts for Parts B, C, and D of her homeowner’s policy?

2. Keith and Dena Diem have personal property coverage with a $250 limit on currency, a $1,000 limit on jewelry, and a $2,500 limit on gold, silver, and pewter. They do not have a personal property floater. If $500 in cash, $2,400 of jewelry, and $1,500 of pewterware were stolen from their home, what amount of loss would be covered by their homeowner’s policy? If the Diems’ deductible is $250, how much will they receive on their claim?

Question 1, 2

1. Everyone needs an emergency fund. Assume your best friend asks you to evaluate a list of investments for an emergency savings fund. Comment on the appropriateness of each of the following:

a. Certificate of deposit

b. Three-month Treasury bills

c. Gold and silver coins

d. Portfolio of energy stocks

e. Money market mutual fund

2. Jana just found out that she is going to receive an end-of-year bonus of $40,000. She is in the 35 percent marginal tax bracket. Calculate her income tax on this bonus. Now assume that instead of receiving a bonus, Jana receives the $40,000 as a long-term capital gain. What will be her tax? Which form of compensation offers Jana the best after-tax return? Would your calculation be different if the gain was short-term rather than long-term?

Chapter 12: Problems and Activities

Question 2

2. The Haley Corporation has just announced year-end results as follows:

Value of company assets	$12,500,000
Value of company liabilities	$6,500,000
Net income	$1,600,000
Common stock dividends	$250,000
Preferred stock dividends	$400,000
Number of shares of common stock outstanding	1,000,000
Closing price of Haley Corporation’s stock	$45.00 per share

a. Calculate the book value per share.

b. Calculate earnings per share.

c. Calculate Haley Corporation’s dividend yield.

d. Calculate the market-to-book ratio.

Chapter 13: Problems and Activities

Question 4

4. An investor is considering purchasing a bond with a 5.5 percent coupon interest rate, a par value of $1,000, and a market price of $927.50. The bond will mature in 9 years. Based on this information, answer the following questions:

a. What is the bond’s current yield?

b. What is the bond’s approximate yield to maturity?

c. What is the bond’s yield to maturity using a financial calculator?

Q1: List and explain the seven advantages associated with owning a mutual fund. Which of these advantages relate to Principle 8? How?

Q2: Calculate the net asset value (NAV) for a mutual fund with the following values:

Market value of securities held in the portfolio	= $1.2 billion
Liabilities of the fund	= $37 million
Shares outstanding	= 60 million

Chapter 15: Problems and Activities

Q1, Q2

Q1: Jazmin earned $51,250 this year. Calculate her total FICA contribution for the year. How much did her employer pay toward FICA?

Q2: Grady Zebrowski, age 25, just graduated from college, accepted his first job with a $50,000 salary, and is already looking forward to retirement in 40 years. He assumes a 3.5 percent inflation rate and plans to live in retirement for 20 years. He does not want to plan on any Social Security benefits. Assume Grady can earn an 8 percent rate of return on his investments prior to retirement and a 5 percent rate of return on his investments post-retirement to answer the following questions using your financial calculator.

a. Grady wants to replace 90 percent of his current income. What is his annual need in today’s dollars?

b. Using  Table 15.2 , Grady thinks he might have an average tax rate of 13 percent at retirement if he is married. Adjusting for taxes, how much does Grady really need per year, in today’s dollars?

c. Adjusting for inflation, how much does Grady need per year in future dollars when he begins retirement in 40 years?

d. If he needs this amount for 20 years, how much does he need in total for retirement? (Hint: Use the inflation-adjusted rate of return.)

e. How much does Grady need to save per month to reach his retirement goal, assuming he does not receive any employer match on his retirement savings?