Person Finance Today #2

11 Jun Person Finance Today #2

Q 1, 2, and 4.

Q1 Mike and Mary Jane Lee have a yearly income of $65,000 and own a house worth $90,000, two cars worth a total of $20,000, and furniture worth $10,000. The house has a mortgage of $50,000, and the cars have outstanding loans of $2,000 each. Utility bills, totaling $150 for this month, have not been paid. Calculate or use Worksheet 4 to determine their net worth, and explain what it means. How would the Lees’ ages affect your assessment of their net worth?

Q2 Using the preceding information, calculate the debt ratio for the Lee household.

Q4: A rumor of “right sizing” at Ojai’s engineering firm has him and his wife, Kaya, concerned about their preparation for meeting financial emergencies. Help them calculate their net worth or complete Worksheet 4, and calculate and interpret the current ratio, given the following assets and liabilities:

Checking account	$2,000
Savings account	$4,000
Stocks	$8,000
Utility bills	$500
Credit card bills	$1,000
Auto loan	$2,600

Chapter 3: Questions from Develop Your Skills – Problems and Activities

Q 1, 3, 5, and 6

Q1: Your mother just won $250,000 for splitting a Nobel Prize with three coworkers. If she invests her prize money in a diversified equity portfolio returning 8 percent per year, approximately how long will it take her to become a millionaire, before accounting for taxes?

Q3: Paul Ramos just graduated from college and landed his first “real” job, which pays $23,000 a year. In 10 years, what will he need to earn to maintain the same purchasing power if inflation averages 3 percent?

Q5: Calculate the future value of $5,000 earning 10 percent after 1 year, assuming annual compounding. Now, calculate the future value of $5,000 earning 10 percent after 20 years.

Q6: Ahmed Mustafa just turned 22 and wants to have $10,283 saved in 8 years, by his 30th birthday. Assuming no additional deposits, if he currently has $6,000 in an intermediate-term bond fund earning a 5 percent yield, will he reach his goal? If not, what rate of return is required to meet his goal?

Problems and Activities: #1, 2, 8, and 9

Question 1: The Lees, a family of two adults and two dependent children under age 16, had a gross annual income of $68,000 for 2014. Determine their standard deduction, exemption, and child tax credit amounts, as well as their marginal and average tax rates, assuming their filing status is married filing jointly.

Question 2: Consider three investors who need to partially liquidate investments to raise cash. In this case, all investments have been held for 3 or more years. Investor A waited for a $1,500 qualified dividend distribution from her mutual fund, and Investor B received $1,500 in interest income from a CD. However, because Investor C could not wait for a distribution, he decided to sell $1,500 of appreciated stock shares. Assuming no commissions, no sales charges, and no state income tax and a 25 percent federal marginal tax bracket, which investment will provide the greatest after-tax amount? Would your answer change if all investors were in the 15 percent marginal tax bracket?

Question 8: Given the following information, would it be better for Illinois resident Salem Marcos to itemize her sales tax or her state income tax on her federal tax return?

Federal taxable income $47,900

Federal marginal income tax rate 25%

State taxable income $41,250

State marginal income tax rate 3%

Total sales tax paid $1,300

Question 9: Calculate the Lifetime Learning Credit available to a single filer earning $40,000 per year if she spent $8,500 on qualified education expenses during 2014.

Chapter 5:

Problems and Activities: #6, 7 and 8

Question 6: Calculate the percentage return on a 1-year Treasury bill with a face value of $10,000 if you pay $9,800 to purchase it and receive its full face value at maturity.

Question 7: Calculate the after-tax return of a 4.65 percent, 20-year, A-rated corporate bond for an investor in the 15 percent marginal tax bracket. Compare this yield to that of a 3.25 percent, 20-year, A-rated, tax-exempt municipal bond, and explain which alternative is better. Repeat the calculations and comparison for an investor in the 33 percent marginal tax bracket.

Question 8: Assuming a 1-year money market account investment at 1.5 percent (APY), a 2.5 percent inflation rate, a 28 percent marginal tax bracket, and a constant $50,000 balance, calculate the after-tax rate of return, the real rate of return, and the total monetary return. What are the implications of this result for cash management decisions?

Chapter 6: Problems and Activities

#6, #8

Question 6: With only a part-time job and the need for a professional wardrobe, Rachel quickly maxed out her credit card the summer after graduation. With her first full-time paycheck in August, she vowed to pay $240 each month toward paying down her $8,000 outstanding balance and to not use the card. The card has an annual interest rate of 18 percent. How long will it take Rachel to pay for her wardrobe? Should she shop for a new card? Why or why not?

Question 8: Javier is currently paying $1,200 in interest on his credit cards annually. If, instead of paying interest, he saved this amount every year, how much would he accumulate in a tax-deferred account earning 8 percent over 10, 15, and 20 years?

Chapter 7: Problems and Activities

#1

Question 1: Rico needs approximately $2,500 to buy a new computer. A 2-year unsecured loan through the credit union is available for 12 percent interest. The current rate on his revolving home equity line is 8.75 percent, although he is reluctant to use it. Rico is in the 15 percent federal tax bracket and the 5.75 percent state tax bracket. Which loan should he choose? Why? Regardless of the loan chosen, Rico wants to pay off the loan in 24 months. Calculate the payments for him, assuming both loans use the simple interest calculation method.

Chapter 8: Problems and Activities

#1, #5

Question 1: Determine the total first-year cost of car ownership for Milagros. She just purchased a vehicle valued for $15,000 with the following costs:

· Auto Loan: Amount—$15,000, Duration—4 years, APR—6.65 percent

· Property Taxes: 2 percent of vehicle value/year

· Sales Taxes: 3 percent of the sales price

· Title and Tags: $40/year

· Maintenance and Usage Costs: $1,500/year

· Insurance: $2,000/year

Question 5: Calculate the monthly payments on a 30-year fixed-rate mortgage at 5 percent for $100,000. How much interest is paid over the life of the loan?