Flashcards in Sample Math Test Questions Part 2 Deck (26):

1

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On December 31, the Franklin Family had a net worth of $180,000. In January, the Franklins acquired a new automobile valued at $12,000, which reduced the family’s total cash by $5,000 and increased their liabilities by $7,000, and they experienced a $20,000 bonanza because of unrealized stock market gains. What is the family’s net worth after these changes?

(A) $180,000

(B) $192,000

(C) $200,000

(D) $212,000

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The answer is (C).

There is no change in net worth as a result of purchase of the automobile because liabilities increased by $7,000 and cash decline by $5,000, so this $12,000 exactly offset the $12,000 car asset. The increase in net worth was $20,000 because of the stock market gain. Assets $287,000 – $87,000 Liabilities = $200,000 Net Worth.

2

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Assume a family uses cash to pay a liability. The effect of this transaction would be

(A) To decrease net worth by the amount of the payment

(B) To increase net worth by the amount of the payment

(C) To leave net worth unchanged

(D) To affect the income statement but not the balance sheet

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The answer is (C).

Since assets have been reduced by the same amount as liabilities are reduced, net worth remains the same. There is no change.

3

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Which of the following ratios is the debt service ratio?

(A) Total Debt Payments ÷ Net Income

(B) Net Worth ÷ Total Debt

(C) Liquid Assets ÷ Total Current Debts

(D) Total Current Debt ÷ Gross Cash Flow (including gifts)

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The answer is (A).

Debt Service Ratio = Total Debt Payments ÷ Gross Income

4

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7. Which one of the following events would tend to reduce a family’s net worth?

(A) A decline in the market value of the family’s assets.

(B) A repayment of the client’s debts before their maturity.

(C) The receipt of gifts from the client’s parents.

(D) The crediting of compound interest to the client’s bank savings account.

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The answer is (A).

A family’s net worth is the difference between the market value of a family’s assets and the family’s liabilities. (B), (C), and (D) will increase net worth, but (A) will cause net worth to decline, at least temporarily.

5

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Cheryl plans to begin saving for her children’s education by depositing $2,500 today in a savings account. She plans to increase her annual deposits by 8 percent each year beginning one year from now. She will make a total of seven deposits, including the initial $2,500. If her account earns 6 percent interest per year, approximately how much will be in the account at the end of 7 years?

(A) $15,150

(B) $16,700

(C) $18,500

(D) $27,850

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The answer is (D).

Set the calculator for beginning-of-period payments. Then calculate the adjusted discount rate and enter it into the calculator as the value of i (including the minus sign).

6

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How is the net present value of an investment opportunity calculated?

(A) Subtract all money outflows from all money inflows.

(B) Sum the outflows and the inflows.

(C) Subtract the present value of money outflows from the present value of money inflows.

(D) Multiply the money inflows by the present value of an annuity of $1.00 for the number of years and applicable interest rate.

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The answer is (C).

The net present value is found by subtracting the present value of the outflows from the present value of the inflows associated with the investment.

7

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If a nominal 5 percent interest rate is compounded monthly, what is the effective annual interest rate?

(A) 4.9 percent

(B) 5.06 percent

(C) 5.12 percent

(D) 5.32 percent

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The answer is (C).

Based on the formula for computing the effective rate, the calculation would be as follows:

Effective rate = [(1 + .05)12/12] – 1

= (1.004167)12 – 1

= 1.05116 – 1

= .0516 = 5.12%

8

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Ralph has been approached about an investment that is expected to have the following cash inflows:

End of Year 1 Amount

1. $1,500

2. $1,500

3. $2,500

4. $4,000

5. $4,000

If he requires a 9 percent return on investment, what is the most that Ralph should pay for this investment?

(A) $6,500

(B) $8,275

(C) $10,000

(D) $13,000

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The answer is (C).

On the HP-12C, press 0, blue g CFo, 1500, blue g, CFj, 2, blue g, Nj, 2500, blue g, CFj, 4000, blue g, CFj, 2, blue g, Nj, 9, i, yellow f, NPV.

On the BA-II Plus, press CF,Enter, ↓, 1500, Enter, ↓, 2, Enter, ↓, 2500, Enter, ↓, ↓, 4000, Enter, ↓, 2, Enter, ↓, NPV, 9, Enter, ↓, CPT.

On the HP-10B, press 0, Cfj, 1500, Cfj, 2, , Nj, 2500, Cfj, 4000, Cfj, 2, , Nj,

9, I/YR, , NPV.

The NPV is $10,002.55.

9

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The terms of a lawsuit settlement provide for Albert to be paid $20,000 today, and then $8,000 at the end of each of the next 9 years. If Albert’s opportunity cost of money is 8 percent, what is the approximate present value of his settlement?

(A) $48,000

(B) $55,000

(C) $65,000

(D) $70,000

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The answer is (D).

On the HP-12C, press 20000, blue g, CFo, 8000, blue g, CFj, 9, blue g, Nj, 8, i, yellow f, NPV.

On the BA-II Plus, press CF, 20000, Enter, ↓, 8000, Enter, ↓, 9, Enter, ↓, NPV, 8, Enter, ↓, CPT.

On the HP-10B, press 20000, Cfj, 8000, Cjf, 9 , Nj, 8, I/YR, ,NPV. The NPV is $69,975.

10

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Which of the following types of communication is distinguished by giving specific guidance or suggestions to clients?

(A) Direct interview

(B) Advising

(C) Indirect interview

(D) Counseling

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The answer is (B).

(A) and (C) are incorrect because interviews are designed to get information FROM the client. (D) is incorrect because counseling avoids specific direction.

11

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Harry is contemplating an investment project with the following pattern of money flows:

Beginning of Year Money Flow

1. $20,000 outflow

2. 5,000 outflow

3. 1,000 inflow

4. 12,000 inflow

5. 30,000 inflow

6.

If Harry’s opportunity cost of money is 9 percent, what is the approximate net present value of this investment opportunity to Harry?

(A) $6,773

(B) $24,587

(C) $31,360

(D) $55,947

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The answer is (A).

On the HP-12C, press 20000, CHS, blue g, CFo, 5000, CHS, blue g, CFj, 1000, blue g, CFj, 12000, blue g, CFj, 30000, blue g, CFj, 9, i, yellow f, NPV.

On the BA-II Plus, press CF, 20000, +/–, Enter, ↓, 5000, +/–, Enter, ↓, ↓, 1000, Enter, ↓, ↓, 12000, Enter, ↓, ↓, 30000, Enter, ↓, ↓, NPV, 9, Enter, ↓, CPT.

On the HP-10B, press 20000, +/–, Cfj, 5000, +/–, Cfj, 1000, Cfj, 12000, Cfj, 30000, Cfj, 9, I/YR, , NPV.

The NPV is $6,773.48.

12

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Arthur and Jeanne Carr estimate that they will need $17,000 to pay for their dream trip to Australia. They now have $8,000 which they can invest at an annual rate of 13 percent compounded quarterly. How long will the Carr’s have to wait before they can make their trip?

(A) 5.89 years

(B) 6.76 years

(C) 6.97 years

(D) 23.56 years

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The answer is (A).

If you use the BA-II Plus, press 17000, FV, 8000, +/–, PV, 3.25, I/Y, CPT, N, ÷, 4, =. The answer, 5.89, will appear on the screen. The HP-12C rounds off the answer computing n. Press 17000, FV, 8000, CHS, PV, 3.25, i, n, 4, ÷. The answer is 6. If you use the HP-10B II, press 17000, FV 8000, +/–, PV, 3.25, I/YR, N, ÷, 4, =. Again, the answer is 5.89 years. (Note in this problem that 3.25% was used as the interest rate, which is 13% divided by 4, because of quarterly compounding. Note also that near the end of the keystrokes the answer was divided by 4 to convert the answer back to years, rather than quarters. Lastly, note that you cannot find the answer here by using a time value table unless you have a 3.25% present value or future valuetable.)

13

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Tammy wants to set aside a sum of money today that will be sufficient to pay 4 years of college tuition. The four tuition payments will be made at the start of each year, beginning immediately. The first payment will be $10,000, and the tuition payments are expected to rise by 6 percent each year. If Tammy’s money earns an after-tax interest rate of 8 percent per year, how much does she need to set aside today?

(A) $35,771.18

(B) $36,730.41

(C) $38,902.54

(D) $43,746.00

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The answer is (C).

The inflation-adjusted interest rate is (1.08 ÷ 1.06) – 1 x 100 = 1.8868%. If you discount the $10,000 initial payment at this rate for 4 years, the result will be a present value of $38,902.54.

14

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Marty and Phil were equal partners in a gift shop, but have decided to terminate the partnership. Marty will purchase Phil’s interest by paying either $20,000 today or $35,000 5 years from today. If Phil’s opportunity cost is 12 percent annually, which of the following options should Phil choose?

(A) Take the $20,000 because it is $140.06 greater than the present value of the $35,000 5 years from now.

(B) Accept the $35,000 because it is $15,000 more than $20,000.

(C) Accept the $20,000 because there is some uncertainty that Marty will honor the agreement give years from now.

(D) Accept the $35,000 because its present value today is greater than the $20,000 by $140.06.

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The answer is (A).

The task here is to discount a future value, $35,000, to its present value at 12% for 5 years. If you wish to use the HP-12C, enter 35000, FV, 12, i, 5, n, and press PV.

Using the BA-II Plus, press 35000, FV, 12, I/Y, 5, N, CPT, PV.

HP-10B II, press 35000, FV, 12, I/YR, 5, N, and PV.

The answer is $19,859.95, will appear on the display, an amount which is $140.06 less than $20,000. You could reach the same answer using the formula.

PV = FV ÷ (1 + i) n $35,000 ÷ (1.12)5 = $35,000 ÷ 1.7623 =$19,860.41.

(Don’t be concerned with slight differences in your answer if you use a formula or time value table vs. a calculator. These methods are less precise than a financial calculator due to rounding.)

Since the present value of $35,000 is less than $20,000 in this case, options (B) and (D) are incorrect.

(C) is not correct either because the uncertainty factor is implicit in the choice of 12 percent as the discount rate.

15

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Walter is planning to deposit $1,500 into a certificate of deposit at the end of each of the next 6 years. The deposits will earn 5 percent compound annual interest. If, instead, Walter were to make the six annual deposits beginning immediately, how would his account balance at the end of the sixth year be affected?

(A) It would be $1,500 higher.

(B) It would be 5 percent higher.

(C) It would be 7 percent higher.

(D) It would be $1,903 higher.

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The answer is (B).

An FVAD is higher than an FVA by one year’s interest earnings, all other things being equal.

16

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Charles borrowed money from Peter a few years ago, and Charles is to repay the money, with interest, 5 years from today, an amount that will then be $8,000. However, Peter has just heard from his accountant that he (Peter) must pay a tax assessment of $4,500 tomorrow. Accordingly, Peter offers Charles the opportunity to pay $4,500 today rather than $8,000 5 years from today. What annual rate of interest is Peter using in discounting Charles’ obligation?

(A) Between 11 percent and 12 percent

(B) Between 12 percent and 13 percent

(C) Between 13 percent and 14 percent

(D) Approximately 21 percent

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The answer is (B).

On a calculator, enter 8000 as FV, 4500 (+/–) as PV, and 5 as n. The value of i is 12.1955%.

17

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Assume that $2,500 is invested for the next 11 years to earn an annual compound return of 9.25 percent. The account at the end of the investment period will be equal to which of the following?

(A) $5,043.75

(B) $6,615.70

(C) $7,227.65

(D) $254,375.00

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The answer is (B).

For example, on the HP-12C, enter 2500, CHS, PV, 11, n, 9.25, i, and press FV. On the BA-II Plus, press 2500, +/–, PV, 9.25, I/Y, 11, N, CPT, FV. On the HP-10B II, press 2500, +/–, PV, 11, N, 9.25, I/YR, and FV. The answer shown will be $6,615.70.

18

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Howard and Betty Osman have $3,990 now and want to invest it in such a way that it will equal $5,000 in 3 years. What annual interest rate will the Osmans’ investment have to earn to achieve this goal?

(A) 7.81 percent

(B) 8.21 percent

(C) 9.6 percent

(D) 10.0 percent

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The answer is (A).

On the HP-12C, enter 3990, CHS, PV, 5000, FV, 3, n, and press i. After a few seconds, the answer, 7.81%, will appear. Or on the BA-II Plus, press 3990, +/–, PV, 5000, FV, 3, N, CPT, I/Y, to obtain the same answer. On the HP-10B II, press 3990, +/–, PV, 5000, FV, 3, N, and I/YR. The answer is 7.81 percent.

19

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Jane borrowed $15,000 from a bank to build a deck on her property. The loan is at 9 percent interest for 10 years. The amount of each equal payment that Jane will have to make is which of the following?

(A) $1,490

(B) $2,144

(C) $2,337

(D) $2,855

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The answer is (C).

Since the loan payments are made at the end of each year, set the calculator for end-of-period payments. Enter 15000 as PV, 9 as i, and 10 as n. The PMT is $2,337.

20

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Walter wants to deposit $1,500 into a certificate of deposit at the end of each of the next 6 years. The deposits will earn 5 percent compound annual interest. If Walter follows through with his plan, approximately how much will be in his account immediately after the sixth deposit is made?

(A) $8,455

(B) $9,450

(C) $10,200

(D) $11,200

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The answer is (C).

On a calculator, enter 1500 as the end-of-period PMT, 5 as i, and 6 as n. FVA = $10,203.

21

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Under the terms of a structured settlement to a liability suit, the plaintiff is to receive $9,000 at the end of each year for the next 9 years. If the plaintiff’s opportunity cost is 9 percent, what is the present value of these payments?

(A) $8,256.88

(B) $53,957.22

(C) $58,813.20

(D) $81,000.00

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The answer is (B).

On the HP-12C calculator, set the machine for the end-of-period mode (blue g, END). Then press the following keys: 9000, CHS, PMT, 9, n, 9, i, PV. The answer will be $53,957.22.

On the BA-II Plus calculator, after you have set it for end-of-period payments, the keystrokes are 9000, PMT, 9, N, 9, I/Y, CPT, PV, to produce the same answer.

Or set the HP-10B II for end-of-period payments and press 9000, PMT, 9, N, 9, I/YR, and PV to produce the answer, $53,957.22.

22

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One investment opportunity offers Larry 4 percent compound interest for the next 4 years, and the second investment opportunity offers him 8 percent compound interest for the same 4 years. Which of the following statements is correct concerning Larry’s investment choices?

(A) Interest at the 4 percent rate will be more than half the interest at the8 percent rate.

(B) Interest at the 8 percent rate will be more than double the interest at the4 percent rate.

(C) The amount of interest earned at the 8 percent rate will be exactly double the amount earned at the 4 percent rate.

(D) It is impossible to compare the interest that will be earned without knowing the amount of money Larry has to invest.

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The answer is (B).

Due to compounding, the interest at the 8 percent rate will be more than double the interest earned at the 4 percent rate. For example, the FVSS of $1.00 for 8 percent and 4 years is $1.3605. For 4 percent and 4 years it is $1.1699. Note that $.3605 is more than double $.1699.

23

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Carlos Melindez plans to invest $1,200 at the end of each year for the next 12 years in an investment opportunity that promises to earn an annual rate of 12 percent. How much will Carlos have at the end of the 12 years?

(A) $14,400.00

(B) $28,959.76

(C) $32,434.92

(D) $40,000.01

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The answer is (B).

On the HP-12C, set the machine for end-of-period payments (blue g, END). Then press 1200, CHS, PMT, 12, n, 12, i, FV. The answer is $28,959.76.

Or on the BA-II Plus, set the machine for end-of-period payments. Then press 1200, +/–, PMT, 12, N, 12, I/Y, CPT, FV, to produce the same answer.

On the HP-10B II, after setting it for end-of-period payments, press 1200, +/–, PMT, 12, N, 12, I/YR, and FV. The answer is $28,959.76.

24

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An investment opportunity offers Rachel 6 percent compound interest over the next 6 years. The second investment opportunity offers her 6 percent compound interest over the next 12 years. Which of the following statements iscorrect?

(A) The amount of interest for 12 years will be more than double that at 6years.

(B) The amount of interest for 12 years will be exactly double that at 6 years.

(C) The amount of interest for 12 years will be less than double that at 6 years.

(D) It is impossible to compare the interest that will be earned without knowing the amount of money that Rachel has to invest.

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The answer is (A).

Opportunity cost measures the return forfeited.

(B) Is incorrect because, although there may be some uncertainty about not receiving the dollar later, this is not the definition of opportunity cost. (C) And (D) have nothing to do with the concept of opportunity cost.

25

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Joanne can invest $9,000 at compound interest of 8 percent. Approximately how long will she have to wait to have $18,000?

(A) 7 years

(B) 8 years

(C) 9 years

(D) 10 years

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The answer is (C).

According to the Rule of 72, the money will double in approximately 9 years (72 divided by 8 = 9).

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