AU FNCE 322 Personal Finance Sample Final Examination questions and answers 2024 Athabasca, Exams of Finance

Download AU FNCE 322 Personal Finance Sample Final Examination questions and answers 2024 Athabasca and more Exams Finance in PDF only on Docsity! 1 FNCE 322 Personal Finance Sample Final Examination questions and answers 2024 Athabasca University 2 Athabasca University Finance 322v5 Personal Finance Sample Final Examination (with Solutions) This sample exam presents the types and ranges of questions that could be asked in a final examination. It is not intended to cover all the material that may be included in the actual final examination. Questions on your actual examination may vary in nature, level of depth, rigour, and difficulty. This is only one tool to help you prepare for your Finance 322 final examination. Show all your math or calculator keying sequences. Total marks: 121 Part I: Multiple Choice (30 marks) Select the best answer from the choices available. 1. The primary objective of the financial planning process is to a. accumulate as much wealth as possible. b. achieve one’s financial goals. c. increase one’s net worth. d. make money. 2. Which of the following best defines net worth? a. monetary funds plus savings b. savings from the income statement that are transferred to the balance sheet c. the difference between total assets and total liabilities d. total assets plus total liabilities 3. Which of the following 5 Cs of credit refers to the ability to service debt from cash flows? a. capital b. conditions c. character 5 9. Which type of risk cannot be diversified away? a. exchange rate risk b. firm-specific risk c. systematic risk d. unsystematic risk 10. Which type of stock would be favoured by an investor with high-risk tolerance? a. blue chip stock b. green stock c. medium cap stock d. small cap stock 11. Which of the following is a characteristic of a sinking fund? a. established with payments from the issuer to the trustee b. established at the same time as the bond is issued c. not used to make periodic repurchases of the bonds in the open market d. increases the default risk faced by the bondholder 12. Which of the following statements about the management expense ratio (MER) is true? a. Index funds have high MERs. b. The level of effort and expertise required to manage a fund may increase the MER. c. The MER has not been deducted from the advertised return of a mutual fund and will be deducted upon the sale of the fund. d. When an investor holds a mutual fund for 7+ years, the MER does not apply. 13. Which of the following is not a commonly available rider for life insurance? a. COLA adjustment b. guaranteed insurability c. multiple of indemnity d. waiver of insurance 6 14. Which of the following factors is considered by an insurance company when quoting a life insurance premium? a. credit rating b. marital status c. number of children d. occupation 15. What is the difference between condominium insurance and the four basic types of insurance (comprehensive, named perils, broad, and no-frills)? a. coverage of losses to the condominium corporation to compensate for lost fees b. loss assessment coverage is added, that is, compensations to cover the cost to hire an assessor to determine how much each condominium owner is owed c. loss assessment coverage is added, that is, loss to common property d. the deductibles are higher because of the added risk of other people’s negligence 16. Which of the following is least likely to provide disability insurance (DI)? a. Canada Pension Plan or Quebec Pension Plan b. homeowner’s insurance c. Employment Insurance d. Worker’s Compensation 17. What is the real rate of return? a. nominal rate, minus the inflation rate b. nominal rate, minus the inflation rate and the risk premium c. nominal rate, minus the risk premium d. rate of return, unadjusted for inflation 18. Which of the following is a feature of a bond? a. Bonds are a form of debt financing to the issuer. b. Bonds are risk free. c. Bonds pay a high rate of interest if held till maturity. d. Bonds provide a company protection from creditors. 7 19. Jean purchased a call option for $0.15 per share for 200 shares. The current share market price is $3.90 and the exercise price of the call option is $3.40. Given that she exercises the option, how much of a call profit can Jean recognize? a. $50.00 b. $54.75 c. $70.00 d. $74.75 Call profit = (share market price – exercise price) x number of shares – option price Call profit = (3.90 – 3.40) x 200 – (.15 x 200) Call profit = (.5) x 200 – 30 Call profit = $70.00 20. Securities that have not been previously traded are offered in the market; securities that have been previously traded are bought and sold in the market. The market is an organized market with a physical location while the market has no specific location but rather is between investment dealers. a. capital; over-the-counter; secondary; IPO b. investment; securities, CDNX; TSX (TSM) c. over-the-counter; CDNX; secondary; IPO d. primary; secondary; stock; over-the-counter 21. If the shares of Salvage Inc. are trading on the TSX with a bid of $16.50 and an ask of $16.60, how much would you receive per share if you put in a market order to sell your shares? a. $16.45 b. $16.50 c. $16.55 d. $16.60 22. You want to buy 100 shares of BLT selling for $25 per share. You can buy the shares on margin with a 30% margin requirement with equity of . If you buy the shares and they go down in price, your broker may issue a . If you are worried that the price of the shares may fall below a certain level, you may put in a order. a. $750; margin call; stop loss b. $750; stop loss; limit c. $1,750; margin call; market order d. $1,750; stop loss; market order 10 Part III: Time Value of Money (13 marks total) Show all of your math, or the calculator steps you took to solve the following problems. 32. Dr. Worthy is a saver and a traveller. a. How much will Dr. Worthy have at the end of year 10 if he deposits $3,000 a year for the next 5 years, and $2,500 each year after that, per year (all at the end of the year)? He will receive 8% interest and make the first payment at the end of this year. (3 marks) -3000 PMT 5 N 8 I/Y FV = 17,600 -17,600 PV -2,500 PMT 5 N 8 I/Y FV = 40,527 b. Suppose, instead, he makes the 10 deposits referred to above as an annuity due (that is, at the beginning of each year). How much will Dr. Worthy have at the end of year 10? (3 marks) 40,527 * (1 + .08) = 43,769 -or- BGN -3,000 PMT 5 N 8 I/Y FV = 19,008 BGN -19,008 PV -2,500 PMT 5 N 8 I/Y FV = 43,769 11 c. (Refer to part a.) Dr. Worthy now believes interest rates will still be 8% compounded annually, for years 1 to 5, but 9%, compounded semi-annually, for years 6 to 10. How much will he have at the end of year 10 from this ordinary annuity (deposits at the end of each year)? (3 marks) -3,000 PMT 5 N 8 I/Y FV = 17,600 For years 6 to 10, an effective rate is needed (Formula 3.7) (1 + .09/2)2 – 1 = 9.2 -17,600 PV -2,500 PMT 5 N 9.2 I/Y FV = 42,351 d. (Refer to part a.) Dr. Worthy wants to take eight cruises at the end of years 11 to 18. Each cruise will cost $8,000. How many cruises can he afford to take? Investments will earn 7%, compounded annually, from years 11 to 18. (2 marks) 8,000 PMT 7 I/Y -40,527 PV N = 6.47 He can take 6 cruises e. (Refer to part d.) If he is determined to take eight vacations, how much can he afford per year for a vacation? (2 marks) 8N -40,527 PV 7 I/Y PMT = $6,787 per vacation 12 Tax Credits Basic Charitable Total Credits 1,745.25 (11,635 x .15) 59.00 ((200 * .15) + (100 * .29)) 1,804.25 Part IV: Taxation (12 marks total) Show all calculations you performed in arriving at the answers to the following questions. 33. a. Using the following information, calculate the total amount of federal tax Molly Marshall will pay. (10 marks) Employment income $55,000 Capital gains 1,800 (purchase price of $3,000 and selling price of $4,800) RRSP contribution 2,000 Basic personal credit 11,635 Charitable donation 300 (not a first time donation) Federal tax rates: 0 to 45,916 15% Over 45,916 to 91,831 20.5% Over 91,831 to 142,353 26% Over 142,353 to 202,800 29% Over 202,800 33% Income Employment 55,000 Tax Capital gains 900 Total Income 55,900 Deductions – RRSP -2,000 Taxable Income 53,900 Federal tax 6,887.40 (45,916 x .15) 1,636.72 ((53,900 – 45,916) x .205) Total Tax 8,524.12 Taxes payable 6,719.87 15 Refer to Chapter 7 for details to include in your description of each step. 16 40. Calculate the purchase price per unit if the balanced fund you are thinking about investing in has a NAVPS of $14 and a front-end load percentage of 3.1%. If you have $7,500 to invest, how many units can you purchase? How much is your investment worth once the fund has been purchased? How much was the commission cost to purchase the fund? (4 marks) Purchase Price per Unit = NAVPS / (1 – Front end load %) Purchase Price per Unit = $14 / (1 - .031) = 14 / .969 Purchase Price per Unit = $14.45 Number of Units purchased = Investment Amount / Price per Unit Number of Units purchased = $7,500 / $14.45 Number of Units purchased = 519.03 units 519.03 units x 14 NAVPS = 7,266.42 is your investment once the fund has been purchased $7,500 – $7,266.42 = $233.58 is your commission cost to purchase the fund 17 Part VIII: Insurance (8 marks) 41. Match the definitions/statements in the left-hand column with the correct term/explanation in the right-hand column. In the middle column, place the letter that corresponds to the term you choose. A letter may be used more than once. If there is no term supplied for a definition, choose item A. Definition/Statements Your Answer Terms/Explanations 1. the person designated to receive the death benefit E A. no term supplied 2. related to disability insurance D B. universal life (UL) 3. the amount the policyholder will receive upon cancellation of permanent life insurance G C. long-term care (LTC) 4. life insurance in which the premium payment is unbundled B D. “own versus any” 5. for a risk to be covered, it has to be specified I E. beneficiary 6. insurance to help pay expenses while an afflicted person remains alive K F. term life insurance 7. insurance to pay for the costs associated with daily living C G. cash surrender value (CSV) 8. the part of an auto insurance policy that covers against an incident other than a collision J H. health care coverage I. named perils J. comprehensive insurance coverage K. critical illness (CI) L. loss of use 20 Part X: Estate Planning (7 marks total) 45. Describe an enduring power of attorney. Discuss its purpose, when it comes into force, and when it may cease to have effect. (3 marks) An enduring power of attorney is an important estate planning tool and provides for an agent (often a close relative or friend) to act in the grantor’s place in the vent the grantor becomes mentally incapacitated. It empowers the agent to act as a legal representative for the grantor. It goes into effect while the grantor is alive, but incapable of acting due to mental incapacity. It can be revoked by the person granting it if done before mental incapacity arises, and ceases to have effect upon the grantor’s death. Under the power of attorney, the agent is precluded from being able to draw up a will on behalf of the grantor. 46. Describe the differences between registering assets under joint tenancy (with right of survivorship: JTWROS) versus tenancy in common (TIC). Describe a situation when it would be appropriate to use each of these approaches. (4 marks) Assets registered under joint tenancy are shared by two or more individuals. When one joint owner dies, the ownership passes directly to the surviving owner(s), bypassing the will. With tenancy in common, two or more individuals share ownership of the assets. When one owner dies, the owner’s share becomes part of the deceased’s estate and is distributed according to the deceased’s will (or according to the jurisdiction’s laws if the deceased died intestate, that is, without a will). Joint tenancy (JWROS) is appropriate when the parties desire that the joint owner(s) automatically inherit the deceased’s interest in the property. The probate process is avoided and this makes it more efficient, less costly, and confidential. Tenancy in common is appropriate when the parties desire that the joint owner(s) not inherit the deceased’s interest in the property; rather, the interest may be bequeathed to others (e.g., when there are second marriages). The children of a first marriage may be the beneficiary of the interest. TIC may also be used for business assets. When a person dies, his/her share of the assets form part of the estate and do not pass to the other business partners, unless indicated in the will. Athabasca University Finance 322 Time Value Equation Sheet 34 FV.=PV(1+ i 35 pv=Fv. [1 a+" 36 Fr) Va is (=) -1 PY 37 EAR= [: +2 y -1 mM 38 FVA,=PMT x [ees] I 3.10 I 1 pva=pmrx| —G*)" I 3.11 PV (perpetuity) = PPA 21