Problem Set 3

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Jan 9, 2024

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ARE 142: Personal Finance Eric Johnson Problem Set #3 Due Thursday, December 7 th at 5:00pm (late assignments will not be accepted) When submitting your problem sets, make sure to show all your work so that we may evaluate your thought process. Your grade is not based on whether or not you have the right answers, but the effort and the steps you took to solving these problems. For questions that require the use of your financial calculator please show the variables entered and what variable you are solving for. Feel free to do the problem set 100% electronically, 100% by hand, or a hybrid approach and upload digital files (pictures/scans of written work is fine) to Canvas for grading. Refer to the syllabus for grading standards. Chapter 10 Questions 1) Angela's roof collapsed on her cabin due to the weight of snow on it. She had to stay in a nearby apartment temporarily while her home was being fixed. She has HO2 coverage so the provision on her homeowners policy that covers her expenses while she is not able to live in her home is known as: A) Coverage A: Dwelling B) Coverage B: Other Structures C) Coverage C: Personal Property D) Coverage D: Loss of Use E) Renting an apartment isn’t covered, only the repair is covered 2) Same scenario and choices as above, but for this question which provision covers the repair of her roof? 3) True/False: Renter's insurance always includes liability insurance 4) Fire, theft, and windstorm damage are examples of A) perils B) hazards C) miscellaneous mishaps D) liabilities 5) Your boyfriend is living in an apartment complex that has had a recent rash of robberies. He has $5,000 worth of rare coins. What should he do to protect himself in case of a robbery? A) Take a written and video tape inventory of his property. B) Add a personal articles floater to his policy. C) Take out personal property replacement cost coverage. D) Only A and B above E) Only B and C above F) A, B, and C above G) MOVE! 6) You have recently inherited a sum of money. You are purchasing an old Victorian home which was built in 1856. The type of insurance needed on the house would be A) HO-1.

B) HO-4. C) HO-6. D) HO-8. 7) The disadvantage of actual cash value coverage of personal property compared to replacement cost coverage is that it A) will reimburse you for replacement cost minus estimated depreciation. B) will reimburse you for the cash value of a new item. C) must be reported as a loss on your tax return. D) does not have to be reported as a loss on your tax return. E) none of the above. 8) Reggie was hosting a BBQ when the deck fell off his house. Several of his friends were hurt in the accident. Luckily for Reggie he has ________ coverage on his homeowner’s insurance. A) personal articles B) loss of use C) personal liability D) none of the above 9) True/False: Coinsurance provisions are a benefit to homeowners as they guarantee that the insurance company will at least pay for a portion of any loss the homeowner suffers. 10) Your home and property have a replacement cost of $200,000. Since you want to make sure that you meet the coinsurance provisions, you should have at least ________ of insurance. A) $160,000 B) $180,000 C) $200,000 D) $220,000 11) An auto policy defines coverage as $250,000/$500,000/$100,000. In this policy, how much would you be covered for bodily injury, in total for each accident? A) $250,000 B) $500,000 C) $100,000 D) None Chapter 11 Questions 12) True/False: As the owner of a corporation’s stock this means I hold an ownership position within that corporation. 13) True/False: Investing in assets such as collectable Barbie Dolls or Beanie Babies are both example of speculating. 14) An investor owns stock from seven different companies, two rental houses, and three government bonds. Together these assets are considered to be the investor's A) collection. B) derivative holding. C) asset class. D) portfolio. E) none of the above.

15) As a young college graduate, your biggest investment ally is A) leverage. B) a windfall. C) tax-free investments. D) time. E) derivatives. 16) Petrina was told by a successful friend to invest in stocks and income- producing real estate. Both of these are examples of ________ investments. A) ownership B) lending C) risk-free D) short-term E) Liquid F) Guaranteed-profitable 17) You purchase shares of BH Inc. at the beginning of the year for $30 per share. After receiving dividends of $4 per share, you sell at the end of the year for $20 per share. What is your one year rate of return? 18) If the nominal rate is 10% and inflation is 3%, what is the real rate of return 19) Suppose that you are beginning an investment plan from scratch. You have decided that you want to retire in 30 years with $1,000,000 in your bank account at that time. How much would you need to invest at the end each of the next 30 years if you could earn 8%? 20) Using the same information as above, but assume your grandparents left you with an inheritance of $50,000 to start you off (instead of you starting from $0). (note: be careful of negative/positive signs… they’re important here) 21) One should keep in mind that when it comes to tax advantages, ________ is/are better than ________. A) ordinary income; capital gains B) capital gains; ordinary income C) tax shelters; capital gains D) marginal rates; ordinary income E) Marginal rates; average rates 22) Bruce Lee owns stocks, bonds, real estate, gold coins, T-Bills, and gemstones. He has a(n) A) equity portfolio. B) default-proof portfolio. C) inflation-proof portfolio. D) diverse portfolio. E) risk adverse portfolio. 23) Albert just purchased a $1,000, 5.4%, 10-year bond when he heard about his friend Charlie who just bought a equal quality bond at $1,000; 9.5%, 10-year bond. What kind of risk did Albert just experience? A) Interest rate B) Market C) Financial D) Business

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Chapter 12 Questions 24) True/False: The market price of the stock is a reflection of the potential earnings per share of the firm. 25) True/False: Capital appreciation of stock refers to an increase in the selling price of your shares. 26) You purchased 100 shares of Quantex at $150 per share for a total investment of $15,000. After your purchase the stock, it immediately has a 3 for 1 split. How many shares do you now own and how much is your investment now worth? 27) Assume a stock has EPS of $0.95, Dividend of $0.80/share, and is currently trading for $50/share. What is the dividend yield for this stock? 28) What does the dividend yield tell an investor? 29) Large-caps, mid-caps, and small-caps refer to the size of the firm issuing the stock, more specifically, to its A) book value. B) market value. C) dividend. D) capacity for growth. 30) Which stock index will have the largest representation of small-, mid- and large -cap stocks? A) DJIA B) S&P 500 C) Wilshire 5000 D) Nasdaq 100 31) When Warren Buffett bought his first shares of Berkshire Hathaway over 55yrs ago it was trading for around $7.50/share. Since running the company, he has never split the original “A” shares of stock (Ticker Symbol BRK-A). As a result, one SINGLE share of its stock currently sells for ________ per share. (look it up and write your answer in… I’ll put a ballpark number but it varies day-by-day) Chapter 15 Questions 32) True/False: A 20 year old employee's Social Security contributions are invested in a general fund account that goes to paying for benefits of current retirees. 33) True/False: The Federal Insurance Contributions Act (FICA) tax withholdings from your paycheck are commonly referred to as Social Security Taxes 34) Many older companies have changed from a defined-benefit plan to a(n) ________, which is a retirement plan where workers are credited with a percentage of their pay each year, plus a predetermined rate of interest. A) funded pension plan B) defined contribution plan C) unfunded pension plan D) percentage plus inflation plan E) none of the above

35) Why have many companies switched from traditional defined-benefits plans to cash-balance plans? A) They want to shower their employees with money. B) Regulatory reform made it necessary. C) They save money with them as a result of reduced future benefits for older workers. D) All of the above are correct. E) Only B and C are correct. 36) Jahwana works for a large corporation with a 401(k) retirement plan. The company matches dollar for dollar the first 5% of the employee's salary contributed to the 401(k). Jahwana currently earns $40,000 in gross salary and she currently contributes 15% of her salary into her 401(k). How much money in dollars is the total contribution to her account every year? 37) Assume the same situation as above, but assume that Jahwana no longer can afford to contribute 15% of her salary and scales back to only contributing 3%. Now how much does the company contribute to her 401(k) plan each year? 38) Erica works for a company with a 401(k) plan. The company matches at $0.50 on the dollar the first 6% of the employee's salary contributed to the 401(k). If Erica earns $90,000 and contributes 12% of her salary, how much will the employer match be in dollars for the year? 39) What advantage does the Roth IRA have over the traditional IRA? 40) True/False: For someone wanting to minimize the taxes they are paying now, a Roth IRA would be preferable to a traditional IRA. 41) How much money do you need in order to live off of $85,000/yr from age 65 to age 100 if your investments are making 5% per year and you plan to die with nothing in the bank? 42) Now, instead of dying with nothing in the bank as described above, assume that you want to be able to leave a total of $250,000 to your children/grandchildren when you die at age 100. Now how much do you need to save by the time you reach 65 in order to retire successfully? (remember, be careful with the positive and negative values) Chapter 16 Questions 43) All of the following are commonly used estate planning tools except A) a will. B) durable power of attorney and joint ownership of assets. C) life insurance. D) gifts and trusts. E) All of the above are commonly used estate planning tools. 44) Herbert Dix picked up a booklet at his attorney's office that described estate planning. All of the following were included as primary objectives of estate planning except A) distribute property according to your wishes and provide for your dependents. B) develop a plan that will minimize estate and inheritance taxes. C) develop a plan that minimizes settlement costs, including legal and accounting fees. D) utilize a living will to describe your choices in a terminal situation and a health care proxy to identify those to whom you relinquish

health care decision-making authority in the event of physical or mental impairment. E) estate planning involves all of the above objectives. 45) True/False: The main purpose of probate is to make sure the beneficiaries are treated equally. 46) True/False: A living will is a directive to a physician that allows you to state your wishes regarding medical treatment in the event you are unable to make decisions for yourself. 47) The individual you name who will care for your minor aged children is known as their ______. 48) Ingrid is single with no dependents. She has been in the hospital with a coma for the last 2 weeks. Her bills are piling up and her rent on her apartment is due. Who is legally empowered to take care of her banking and bill paying while she is incapacitated? A) Whoever is named as her executor B) Whoever is named in her living will C) Whoever is named in her durable power of attorney D) Whoever is named in her durable health care power of attorney 49) What is/are advantage(s) to establishing a trust? A) Trusts bypass probate. B) Trusts can ensure that children from a previous marriage will receive some inheritance. C) Trusts can be used to shelter assets from estate taxes. D) A trust does not become a matter of public record, so it offers confidentiality. E) All of the above are advantages to using a trust. 50) Alfred has appointed an executor in his will. This person will be responsible for A) carrying out Alfred's wishes. B) acting under the durable power of attorney. C) managing Alfred's property until the estate is passed on to the heirs. D) acting under the durable health care power of attorney. E) all of the above F) only A and C. 51) Which of the following is a requirement of a valid will? A) You must be mentally competent when the will is written. B) You can't be under undue influence of another person. C) Your will must conform to the laws of the state. D) All of the above E) Only A and B 52) All of the following features are common to a basic will except A) introductory statement. B) payment of debt and taxes clause. C) disposition of property clause. D) establishment of a trust. E) appointment clause. 53) True/False: Through joint tenancy in common form of ownership, George was able to transfer his share of his assets in a company he co-owns with his best friend, to his son instead of to his best friend.

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54) True/False: Giving assets away as a gift reduces the value of your estate and allows you to help your heirs while you're still alive. 55) Dying without a will is said to be called dying _________. Chapter 17 Questions 56) Suppose that immediately after graduation you invested $3,000 each year for 15 years and nothing thereafter. You earn 10% on this money. How much money would you have on deposit when you retired in 40 years (25 years after the deposits stopped)? 57) True/False: If you and your spouse have different money management styles, it may be wise to maintain separate checking accounts. 58) Why is discussing personal finances with your significant other so important prior to getting married?