1. (TCO A) Use future or present value techniques to solve the following problems. (Note: You can use tables or a financial calculator. If you use a calculator, please provide the inputs you used to solve the problems.) (5 points each = total 20 points)
a. Starting with $20,000, how much will you have in 20 years if you can earn 5% on your money? b. If you inherited $100,000 today and invested all of it in a security that paid an 8% rate of return, how much would you have in 15 years? c. If the average new home costs $200,000 today, what will be the value in 10 years if inflation is 4% per year? d. If you can earn 9% per year, how much will you have to save each year if you want to retire in 40 years with $3 million? (Points : 20)
Question 2. 2. (TCO A) Construct a balance sheet for the Smith family from the following information. Be sure the format is correct. (20 points for balance sheet) Are the Smiths solvent or insolvent? Explain. (5 points)
Show all work. (25 points total for problem)
Cash on hand 100
Bank credit card balance1 5,000
Auto loan balance 25,000
Primary residence (FMV) 250,000
Coin collection 1,500
2010 Toyota 25,000
(Points : 25)
Question 3. 3. (TCO B) Part 1: The Smith family would like to itemize its deductions for the current tax year. The Smiths’ adjusted gross income (AGI) is $85,000. Their filing status is Married Filing Jointly. Looking at the items below, which ones can they itemize, and what is the total they can take on their Schedule A itemized deductions? (30 points) Show all of your work to obtain full credit.
Part 2: Assuming that the Smiths’ standard deduction would be $11,400 for this tax year and that they are in the 25% marginal federal income tax bracket, how much does itemizing save their family in taxes?
Medical expenses 5,000
State income taxes paid 5,000
Real estate taxes 4,000
Home mortgage interest paid 10,000
Gifts to charity 2,000
Credit card interest 1,000
Unreimbursed employee expenses 2,000
(Points : 30)
Question 4. 4. (TCO C) Alan and Barbara are in the process of purchasing their first home. However, they cannot decide whether a 15-year fixed-rate mortgage or a 30-year fixed-rate mortgage is best for them. They have decided to finance $200,000 and can get the 15-year mortgage at 4.5% and the 30-year mortgage at 5%. (35 points total) First, calculate the monthly payment of each loan. (15 points)
Next, discuss the pros and cons of a 15-year mortgage versus a 30-year mortgage. (15 points)
(Points : 35)
Question 5. 5. (TCO D) John Savage is a 35-year-old accountant who earns $72,000 per year. His monthly take-home pay is $4,500. His wife Jessica works part-time at their church but has no employee benefits. John’s firm has a group short-term disability plan, which will provide him with 65% of his gross monthly pay for 2 years only. What would you advise John regarding his potential need for additional disability insurance, including the type, amount of benefits, or other policy provisions? (30 points total) (Points : 30) Question 6. 6. (TCO E) The ABC Class A share mutual fund has a NAV (net asset value) of $35.64 40and an offer/purchase price of $37.81. Use this information to answer the following questions. You must show all work for full credit. (30 points total) a. How many shares will you receive when you invest $10,000? (5 points) b. What is the percentage load? (5 points)
c. What is the load charge, in dollars, for this transaction? (5 points) d. The fund in the above example is a front-end load fund. If it were a no-load fund, what three criteria must be met for a mutual fund to be considered a no-load fund? (15 points)
(Points : 30)
Question 7. 7. (TCO F) You are trying to help a friend decide on what type of IRA to use for his retirement plan. How would you outline the differences between a traditional deductible IRA, a traditional nondeductible IRA, and a Roth IRA to him? (Please explain in detail and emphasize the tax issues of each.) (40 points total) (Points : 40)
Deductible: Your contributions are tax-deductible. Your funds will grow tax deferred, but you must pay taxes on your contributions when you withdraw them at retirement. IRS rules mandate that you begin taking distributions from your traditional IRA the year after you turn 70½, although this rule was waived on a one-time basis for 2009. The size of those distributions depends on your life expectancy and your spouse’s life expectancy, if you are married. Nondeductible: If your income is too high to contribute to a tax-deductible IRA, you can contribute to a nondeductible IRA. Unlike the more common IRA, your contributions to this type of IRA are not tax-deductible. You can mingle nondeductible contributions with deductible contributions, although the IRS requires you to track the amount of your nondeductible contributions.
This is important when you begin to make your required minimum distributions from your IRA because you won’t have to pay taxes on the nondeductible portion. This can get complicated, and taxpayers who do this need to keep good records of their various types of contributions.Roth IRAYour contributions to a Roth IRA are not tax-deductible. Distributions from a Roth are tax-free when you withdraw funds in retirement, as long as you own the account for five years and withdraw the money after age 59½. Roth IRAs require no minimum distributions. And beginning in 2010, you can convert to a Roth IRA regardless of your income.
For the traditional and Roth IRAs provide generous tax breaks. But it’s a matter of timing when you get to claim them. Traditional IRA contributions are tax deductible on both state and federal tax returns for the year you make the contribution, while withdrawals in retirement are taxed at ordinary income tax rates. Roth IRAs provide no tax break for contributions, but earnings and withdrawals are generally tax-free. So with traditional IRAs, you avoid taxes when you put the money in. With Roth IRAs, you avoid taxes when you take it out in retirement.
Question 8. 8. (TCO G) Jack and Dianne are married and in their mid-30s. They have two children, ages 3 and 5. They have a combined income of $100,000 and own their home in joint tenancy with right of survivorship. The house has a market value of $300,000, and the mortgage is $250,000. Jack has $100,000 of group term life insurance and an individual term life insurance policy of $200,000. However, Jack and Dianne have not prepared wills. Jack is not worried because the house is in joint tenancy. Jack does plan to have a will drafted soon but doesn’t think that Dianne needs one. If you were advising them, what recommendations would you make regarding their estate planning? Why should they have wills drafted sooner rather than later? (40 points total) (Points : 40)
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