QUESTION 1 Calculate the Approximate Compound Yield (ACY) over the next four yea

Question

QUESTION 1

Calculate the Approximate Compound Yield (ACY) over the next four years for the following stock investment:

Year 1: $4.25 Annual Dividend
Year 2: $5.00 Annual Dividend
Year 3: $6.50 Annual Dividend
Year 4: $6.00 Annual Divident
$58 Current purchase price and $67 anticipated Sale Price in Four Years

QUESTION 2

Jim's house was famaged when lightning struck his roof. The cost to fix the home will be $30,000. He carries an HO-3 policy with a $500 deductible. If the home is insured for $200,000 and the replacement value is $180,000, how much will Jim's reimbursement from the insurance company be?

QUESTION 3

Victor has a $10,000 cash-value policy purchased 15 years ago when he was 25 years old. The policy will be paid at age 65. Using a Table in the chapter, find the cash value of the insurance policy. Explain the other two options available to Victor.

INFORMATION FOR QUESTION 4 AND QUESTION 5

Jen caused a 3 car accident near her home in Akron, Ohio. She has the Ohio minimum liability coverage with no collision or comprehensive coverage. Jason, the driver of one of the other cars, suffered injuries leading to $42,000 in medical bills. No other injuries were suffered. The damage to Jen's car was $2,000 and she caused $22,000 in damage to the other two cars.

QUESTION 4

How much of the amount of the bodily injury and property damage will be covered by the insurance company?

QUESTION 5

How much of the amount of the bodily injury and property damage will be paid for by Jen?

QUESTION 6

Anna and Mike are considering their life insurance options. They both make about $50,000/year. In the event that something happens to one of them, they figure they will need to cover the other person's salary at %80 for 10 years. Anna and Mike DO NOT participate in Social Security. They are doing a needs-based approach and want to include $5,000 in final costs to cover the funeral arrangements and $10,000 for readjustment period needs. Based on the needs-based approach, what face value of life insurance is needed? (Assume that Anna and Mike have no other resources to put toward this need and that they would invest the life insurance proceeds in an account returning 4% annually).

QUESTION 7

Dr. Houselover has an annual income of $129,000. She has monthly payments for auto loan ($300), student loan ($250), and credit card payments ($400). Using a 35 percent back-end ration, what are the monthly mortgage payments (including taxes and insurance) she can afford?

QUESTION 8

Jack earned 6.5% last year on a $7500 investment in taxable bonds. If the applicable tax rate was 25%, what is Jack's after-tax profit?

QUESTION 9

Jules is deciding between a corporate (taxable) bond which has annual return of 5.9% and municipal (tax-free) bond that has an annual return of 4.3%. If Jules is in the 25% tax bracket, which bond should she choose?

INFORMATION FOR QUESTION 10 - 13

Five years ago, in December 2007, Emily invested $1,000 by buying Apple Inc. shares at the price of $183.45 per share. She decided to continue investing $1,000 every December because she believes in "dollar cost averaging" and likes Apple gadgets. She paid $88.26 per share in 2008, $185.50 per share in 2009, $94.00 per share in 2010, and $196.43 per share in 2011. Yesterday, she sold 5 shares for $320.15 per share to pay for her holoday trip.

QUESTION 10

What was the Average Price paid by Emily?

QUESTION 11

What were the proceeds from Emily's sale of the five shares?

QUESTION 12

What is the total cost basis for Emily's five shares?

QUESTION 13

What is Emily's gain?

Explanation / Answer

QUESTION 1

Calculate the Approximate Compound Yield (ACY) over the next four years for the following stock investment:

Year 1: $4.25 Annual Dividend
Year 2: $5.00 Annual Dividend
Year 3: $6.50 Annual Dividend
Year 4: $6.00 Annual Dividend
$58 Current purchase price and $67 anticipated Sale Price in Four Years

Answer:

ACY = [annual dividend + (projected price – current price)/n] / (projected price +

                                                                                                       current price)/2

Therefore average dividend = Total dividend/4 = $21.75/4 = $5.4375

ACY = [$5.4375 + ($67-$58)/4] / ($67+$58)/2 = 0.123 or 12.3%

QUESTION 2

Jim's house was Damaged when lightning struck his roof. The cost to fix the home will be $30,000. He carries an HO-3 policy with a $500 deductible. If the home is insured for $200,000 and the replacement value is $180,000, how much will Jim's reimbursement from the insurance company be?

Answer:

As the insurance value which is $200,000 is weel above the replacement cost of the house $180,000 then the full amount of cost which is $30,000 less deductible would be reimbursed to Jim.

Therefore reimbursement = $30,000 - $500 = $29,500

QUESTION 3

Victor has a $10,000 cash-value policy purchased 15 years ago when he was 25 years old. The policy will be paid at age 65. Using a Table in the chapter, find the cash value of the insurance policy. Explain the other two options available to Victor.

INFORMATION FOR QUESTION 4 AND QUESTION 5

Jen caused a 3 car accident near her home in Akron, Ohio. She has the Ohio minimum liability coverage with no collision or comprehensive coverage. Jason, the driver of one of the other cars, suffered injuries leading to $42,000 in medical bills. No other injuries were suffered. The damage to Jen's car was $2,000 and she caused $22,000 in damage to the other two cars.

QUESTION 4

How much of the amount of the bodily injury and property damage will be covered by the insurance company?

Answer:

$25000 each for the bodily injury and property damage will be covered by the insurance company.

QUESTION 5

How much of the amount of the bodily injury and property damage will be paid for by Jen?

Answer: As the bodily injury is covered only by $25,000 per person the rest of the amount which is $42,000 - $25,000 = $17,000 is to be paid by Jen.

QUESTION 6

Anna and Mike are considering their life insurance options. They both make about $50,000/year. In the event that something happens to one of them, they figure they will need to cover the other person's salary at %80 for 10 years. Anna and Mike DO NOT participate in Social Security. They are doing a needs-based approach and want to include $5,000 in final costs to cover the funeral arrangements and $10,000 for readjustment period needs. Based on the needs-based approach, what face value of life insurance is needed? (Assume that Anna and Mike have no other resources to put toward this need and that they would invest the life insurance proceeds in an account returning 4% annually).

Answer:

QUESTION 7

Dr. Houselover has an annual income of $129,000. She has monthly payments for auto loan ($300), student loan ($250), and credit card payments ($400). Using a 35 percent back-end ration, what are the monthly mortgage payments (including taxes and insurance) she can afford?

Answer: Total payment for loans = $300 + $250 + $400 = $950 per month

Or annually total payments = $11,400

So debt to mortgage ratio = $11,400 / $129,000 = 8.83%

So she can afford 91.17% of debt payments.

QUESTION 8

Jack earned 6.5% last year on a $7500 investment in taxable bonds. If the applicable tax rate was 25%, what is Jack's after-tax profit?

Answer:

Jack earning = 6.5% x $7500 = $487.5

Tax = 25% x $487.5 = $121.875

Jack’s after tax profit = $365.625

QUESTION 9

Jules is deciding between a corporate (taxable) bond which has annual return of 5.9% and municipal (tax-free) bond that has an annual return of 4.3%. If Jules is in the 25% tax bracket, which bond should she choose?

Answer:

After tax rate of corporate bond = 5.9% x (1-25%) = 4.425%

That is higher than the rate of 4.3% offered by municipal bonds.

Therefore corporate bonds are what she choose.

INFORMATION FOR QUESTION 10 - 13

Five years ago, in December 2007, Emily invested $1,000 by buying Apple Inc. shares at the price of $183.45 per share. She decided to continue investing $1,000 every December because she believes in "dollar cost averaging" and likes Apple gadgets. She paid $88.26 per share in 2008, $185.50 per share in 2009, $94.00 per share in 2010, and $196.43 per share in 2011. Yesterday, she sold 5 shares for $320.15 per share to pay for her holoday trip.

QUESTION 10

What was the Average Price paid by Emily?

Answer:

Number of shares bought at $183.45 = $1000/$183.45 = 5.45

Number of shares bought at $88.26 = $1000/$88.26 = 11.33

Number of shares bought at $185.5 = $1000/$185.5 = 5.391

Number of shares bought at $94 = $1000/$94 = 10.638

Number of shares bought at $196.43 = $1000/$183.45 = 5.091

Therefore total shares bought = 37.9 shares

Total investment made in 5 years = $5000

So average price paid = $5000/37.9 = $131.93

QUESTION 11

What were the proceeds from Emily's sale of the five shares?

Answer: Proceeds = $320.15 x 5 = $1600.75

QUESTION 12

What is the total cost basis for Emily's five shares?

Answer:

As the average price paid for the stocks = $131.93

Therefore total cost basis = 5 x $131.93 = $659.63

QUESTION 13

What is Emily's gain?

Answer:

Emily’s gain = $1600.75 - $659.63 = $941.12

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