FIN 580 Midterm Exam

1. (TCO A) Alan and Barbara have liquid assets of $10,000 and other assets of $90,000. Their total liabilities equal $20,000. What is their net worth? (Show all work.)

2. (TCO A) Construct a balance sheet from the following information. Be sure the format is correct. (Show all work.)

Cash on hand $500
Bank credit card balance 750
Taxes due 500
Utility bills (over due) 120
Auto loan balance 6,000
Mortgage 45,000
Primary residence 60,000
Jewelry 1,200
Stocks 6,000
Coin collection 2,500
2001 Toyota 7,500
Auto payment 250

3. (TCO A) The following questions are worth 5 points each. Please show all work.

a. Inflation is expected to average 5% for the long term and Mr. Smith earned $74,000 this year, how much must he earn in 20 years just to keep up with inflation and maintain the balance between his income and his increasing expenditures?
b. Jamie wants to have $2,000,000 for her retirement in 35 years. How much should she save annually if she thinks she can earn 8% on her investments?
c. The Flemings will need $160,000 annually for 30 years during retirement. How much will they need at retirement if they can earn a 4% rate of return?
d. The Hamptons want to have $2,500,000 for their retirement in 30 years. How much should they save annually if they think they can earn 7% on their investments?

4. (TCO B) From the information given below, determine Steve's gross income for tax purposes.

Salary $32,000
Interest (checking account) $25
Cash received as birthday gift $1,000
Dividends (mutual funds) $5,500
Child support payments received from ex-wife $24,000
Life insurance benefits received from aunt's death $50,000

5. (TCO B) George has the following expenses that he wants to include as itemized deductions for the year. His adjusted gross income is $60,000. What is the total itemized deduction he can take? (Show all work.)

Medical expenses $4,500
Home mortgage interest 8,000
Credit card interest 450
Charitable contributions 1,500
State property taxes 2,400
Job-related expenses 1,900

6. (TCO C) Maggie wants to open a checking account that will be the least expensive given her normal financial transactions. She typically writes 15 checks a month and uses an ATM 35 times a month. Her minimum checking balance falls to about $350 in an average month. Which of the following accounts would be least expensive for Maggie? (Show all your work.)

Account A:
No monthly fee is charged if a minimum balance of at least $300 is maintained.
A $5.00 fee is charged in any month the minimum balance falls below $300.
An ATM fee of $0.10 per transaction is charged on all transactions.

Account B:
No monthly fee is charged if a minimum balance of at least $500 is maintained.
A $3.00 fee plus $0.10/check is charged in any month the minimum balance falls below $500. There is no ATM fee on transactions

7. (TCO C) Dick and Jane have just purchased a house and are calculating how much money they will need when the closing day rolls around. The purchase price is $200,000. They will make a 20% down payment, and they must pay two points on the loan. Closing costs should be 3% of the purchase price. What is the total dollar amount they will need at closing? (Show all work.)

8. (TCO C) Chris and Karen have a combined take-home income of $5,000. Their total monthly payments on consumer debt are $875. What is their debt safety ratio? Are they exhibiting any sign of approaching credit problems?

9. (TCO C) Michelle just finished her first year of work following graduation, and she feels it is time she assess her financial situation. Her annual gross income is $45,000, and her income after taxes is $35,800. She has the following liabilities. What is Michelle's debt safety ratio, and what does it say about Michelle's financial situation?

Balance Payment
Auto loan $6,000 $265
Education loan $10,000 $250
Credit card debt $1,200 $58
Personal line of credit $3,900 $195
Home mortgage $75,000 $550