BUSN 380 DEVRY COMPLETE PROBLEM SET PACKAGE
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<strong>BUSN</strong> <strong>380</strong> <strong>DEVRY</strong> <strong>COMPLETE</strong> <strong>PROBLEM</strong><br />
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<strong>BUSN</strong> <strong>380</strong> DeVry Complete Problem Set Package<br />
<strong>BUSN</strong><strong>380</strong><br />
<strong>BUSN</strong> <strong>380</strong> DeVry Week 1 Problem Set 1<br />
Problem Set 1 (Note: Some of these problems require the use of the time value of money tables in the<br />
Chapter 1 Appendix).<br />
1. Ben Collins plans to buy a house for $65,000. If that real estate property is expected to increase in<br />
value 5 percent each year, what would its approximate value be seven years from now?<br />
2. At an annual interest rate of five percent, how long would it take for your savings to double?<br />
3. In the mid-1990s, selected automobiles had an average cost of $12,000. The average cost of those<br />
same motor vehicles is now $20,000. What was the rate of increase for this item between the two time<br />
periods?<br />
4. A family spends $28,000 a year for living expenses. If prices increase by 4 percent a year for the next<br />
three years, what amount will the family need for its living expenses?<br />
5. What would be the yearly earnings for a person with $6,000 in savings at an annual interest rate of 5.5<br />
percent?<br />
6. Elaine Romberg prepares her own income tax return each year. A tax preparer would charge her $60<br />
for this service. Over a period of 10 years, how much does Elaine gain from preparing her own tax return?<br />
Assumes she can earn 3 percent on her savings.<br />
7. Tran Lee plans to set aside $1,800 a year for the next six years, earning 4 percent. What would be the<br />
future value of this savings amount?
8. If you borrow $8,000 with a 5 percent interest rate to be repaid in five equal payments at the end of the<br />
next five years, what would be the amount of each payment? (Note: Use the present value of an annuity<br />
table in the Chapter 1 Appendix.)<br />
9. Based on the following data, compute the total assets, total liabilities, and net worth. Liquid assets,<br />
$3,670 Household assets, $89,890 Investment assets, $8,340 Long-term liabilities, $76,230 Current<br />
liabilities, $2,670<br />
10.Which of the following employee benefits has the greater value? Use the formula given in the<br />
“Financial Planning Calculations” – “Tax-Equivalent Employee Benefits” box found in Chapter 2 to<br />
compare these benefits. (Assume a 28 percent tax rate.)<br />
A nontaxable pension contribution of $4,300 or the use of a company car with a taxable value of $6,325.<br />
<strong>BUSN</strong> <strong>380</strong> DeVry Week 2 Problem Set 2<br />
Problem Set 2<br />
1. Thomas Franklin arrived at the following tax information:<br />
Gross salary, $46,660<br />
Interest earnings, $225<br />
Dividend income, $80<br />
One personal exemption, $3,400<br />
Itemized deductions, $7,820<br />
Adjustments to income, $1,150<br />
What amount would Thomas report as taxable income?<br />
2. What would be the net annual cost of the following checking account?<br />
Monthly fee, $3.75; processing fee, 25 cents per check; checks written, an average of 22 a month.<br />
3. What would be the average tax rate for a person who paid taxes of $4,864.14 on a taxable income of<br />
$39,870?<br />
4. A payday loan company charges 4 percent interest for a two-week period. What would be the annual<br />
interest rate from that company?<br />
5. What is the annual opportunity cost of a checking account that requires a $350 minimum balance to<br />
avoid service charges? Assume an interest rate of 6.5 percent.<br />
<strong>BUSN</strong> <strong>380</strong> DeVry Week 3 Problem Set 3
Problem Set 3<br />
1. Louise McIntyre’s monthly gross income is $2,000. Her employer withholds $400 in federal, state, and<br />
local income taxes and $160 in Social Security taxes per month. Louise contributes $80 per month for her<br />
IRA. Her monthly credit payments for VISA, MasterCard, and Discover card are $35, $30, and $20,<br />
respectively. Her monthly payment on an automobile loan is $285. What is Louise’s debt payments-toincome<br />
ratio? Is Louise living within her means?<br />
2. Calculating Debt Payments – to – Income Ratio. Suppose that your monthly net income is $2,400. Your<br />
monthly debt payments include your student loan payment, a gas credit card and they total $360. What is<br />
your debt payments – to – income ratio?<br />
3. Dave borrowed $500 for one year and paid $50 in interest. The bank charged him a $5 service charge.<br />
What is the finance charge on this loan?<br />
Dave borrowed $500 on January 1, 2006, and paid it all back at once on December 31, 2006.<br />
What was the APR?<br />
If Dave paid the $500 in 12 equal monthly payments, what is the APR?<br />
4. Calculating Simple Interest on a Loan. Damon convinced his aunt to lend him $2,000 to purchase a<br />
plasma digital TV. She has agreed to charge only 6 % simple interest, and he has agreed to repay the<br />
loan at the end of one year. How much interest will he pay for the year?<br />
5. After visiting several automobile dealerships, Richard Welch selects the car he wants. He likes its<br />
$10,000 price, but financing through the dealer is no bargain. He has $2,000 cash for a down payment,<br />
so he needs an $8,000 loan. In shopping at several banks for an installment loan, he learns that interest<br />
on most automobile loans is quoted at add-on rates. That is, during the life of the loan, interest is paid on<br />
the full amount borrowed even though a portion of the principal has been paid back. Richard borrows<br />
$8,000 for a period of four years at an add-on interest rate of 11 percent.<br />
Questions<br />
a. What is the total interest on Richard’s loan?<br />
b. What is the total cost of the car?<br />
c. What is the monthly payment?<br />
d. What is the annual percentage rate (APR)?<br />
<strong>BUSN</strong> <strong>380</strong> DeVry Week 4 Problem Set 4
Problem Set 4<br />
1. Determining Profit or Loss from an Investment. Three years ago, you purchased 150 shares of IBM<br />
stock for $88 a share. Today, you sold your IBM stock for $103 a share. For this problem, ignore<br />
commissions that would be charged to buy and sell your IBM shares.<br />
1. What is the amount of profit you earned on each share of IBM stock?<br />
2. What is the total amount of profit for your IBM investment?<br />
2. Calculating Rate of Return. Assume that at the beginning of the year, you purchase an investment for<br />
$8,000 that pays $100 annual income. Also assume the investment’s value has decreased to $7,400 by<br />
the end of the year.<br />
1. What is the rate of return for this investment?<br />
2. Is the rate of return a positive or negative number?<br />
3. Calculating Earnings Per Share, Price-Earnings Ratio, and Book Value. As a stockholder in Bozo Oil<br />
Company, you receive its annual report. In the financial statements, the firm has reported assets of $9<br />
million, liabilities of $5 million, after-tax earnings of $2 million, and 750,000 outstanding shares of<br />
common stock.<br />
1. Calculate the earnings per share of Bozo Oil’s common stock.<br />
2. Assuming that a share of Bozo Oil’s common stock has a market value of $40, what is the firm’s<br />
price-earnings ratio?<br />
3. Calculate the book value of a share of Bozo Oil’s common stock.<br />
4. Determining Interest and Approximate Bond Value. Assume that three years ago, you purchased a<br />
corporate bond that pays 9.5 percent. The purchase price was $1,000. Also assume that three years after<br />
your bond investment, comparable bonds are paying 8 percent.<br />
1. What is the annual dollar amount of interest that you will receive from your bond investment?<br />
2. Assuming that comparable bonds are paying 8 percent, what is the approximate dollar price for<br />
which you could sell your bond?<br />
3. In your own words, explain why your bond increased or decreased in value.<br />
5. Using Margin. Bill Campbell invested $4,000 and borrowed $4,000 to purchase shares in Wal-Mart. At<br />
the time of investment, Wal-Mart was selling for $45 a share.<br />
1. If Bill paid $30 commission, how many shares could Bill buy if he used only his own money and<br />
did not use margin?<br />
2. If Bill paid $50 commission, how many shares could Bill buy if he used his $4,000 and borrowed<br />
$4,000 on margin to buy Wal-Mart stock?<br />
3. Assuming that Bill did use margin, paid $90 commission to sell his stock, and sold his Wal-Mart<br />
stock for $53, how much profit did he make on his Wal-Mart investment?
6. Calculating yields. Assume you purchased a corporate bond at its current market price of $850 on<br />
January 2, 2002. It pays 9 percent interest and it will mature on December 31, 2011, at which time the<br />
corporation will pay you the face value of $1,000.<br />
a. Determine the current yield on your bond investment at the time of purchase.<br />
b. Determine the yield to maturity on your bond investment.<br />
<strong>BUSN</strong> <strong>380</strong> DeVry Week 5 Problem Set 5<br />
Problem Set 5<br />
1. Tammy Monahan is considering the purchase of a home entertainment center. The product attributes<br />
and weights she plans to consider are:<br />
Portability .1<br />
Sound projection .6<br />
Warranty .3<br />
Tammy rated the brands as follows:<br />
portability sound projection warran<br />
Brand A 6 8 7<br />
Brand B 9 6 8<br />
Brand C 5 9 6<br />
Using the Consumer Buying Matrix presented in Chapter 8, conduct a quantitative product evaluation<br />
rating for each brand. What other factors is Tammy likely to consider when making her purchase?<br />
2. Based on the following, calculate the costs of buying and of leasing a motor vehicle.<br />
Purchase Costs<br />
Leasing Costs<br />
Down payment $1,500 Security deposit $500<br />
Loan payment $450 for 48 months<br />
Lease payment $450 for 36 months<br />
Estimated value at End of loan $4,000 End of lease charges $600<br />
Opportunity cost interest rate: 4 percent<br />
3. You can purchase a service contract for all of your major appliances for $180 a year. If the appliances<br />
are expected to last for 10 years, and you earn 5 percent on your savings, what would be the future value<br />
of the amount you would pay for the service contract?<br />
4. You estimate that you can save $3,800 by selling your own home rather than using a real estate agent.<br />
What would be the future value of that amount if invested for five years at 7 percent?
5. John Walters is comparing the cost of credit to the cash price of an item. If John makes a $60 down<br />
payment, and pays $34 a month for 24 months, how much more would that be than the cash price of<br />
$695?<br />
<strong>BUSN</strong> <strong>380</strong> DeVry Week 6 Problem Set 6<br />
Problem Set 6<br />
1. For each of the following situations, what amount would the insurance company pay?<br />
1. Wind damage of $835; the insured has $500 deductible.<br />
2. Theft of a stereo system worth $1,300; the insured has a $250 deductible.<br />
3. Vandalism that does $425 of damage to a home; the insured has a $500 deductible.<br />
2. Beverly and Kyle Nelson currently insure their cars with separate companies paying $650 and $575 a<br />
year. If they insure both cars with the same company, they would save 10 percent on the annual<br />
premiums. What would be the future value of the annual savings over ten years based on an annual<br />
interest rate of 6 percent?<br />
3. As of 2008, per capita spending on health care in the United States was about $8,000. If this amount<br />
increased by 5 percent a year, what would be the amount of per capital spending for health care in 10<br />
years?<br />
4. Sarah’s comprehensive major medical health insurance plan at work has a deductible of $750. The<br />
policy pays 85 percent of any amount above the deductible. While on a hiking trip, she contracted a rare<br />
bacterial disease. Her medical costs for treatment, including medicines, tests, and a six-day hospital stay,<br />
totaled $8,893. A friend told her that she would have paid less if she had a policy with a stop-loss feature<br />
that capped her out-of-pocket expenses at $3,000. Was her friend correct? Show your computations.<br />
Then determine which policy would have cost Sarah less and by how much.<br />
5. The Kelleher family has health insurance coverage that pays 80 percent of out-of-hospital expenses<br />
after a $500 deductible per person. If one family member has doctor and prescription medication<br />
expenses of $1,100, what amount would the insurance company pay?<br />
6. You are the wage earner in a “typical family,” with $40,000 gross annual income. Use the easy method<br />
to determine how much life insurance you should carry.<br />
<strong>BUSN</strong> <strong>380</strong> DeVry Week 7 Problem Set 7<br />
Problem Set 7
1. Calculating Net Asset Value. Given the information below, calculate the net asset value for the Boston<br />
Equity mutual fund.<br />
Total assets $225,000,000<br />
Total liabilities 5,000,000<br />
Total number of shares 4,400,000<br />
2. Calculating the Rate of Return of Investment Using Financial Leverage. Suppose Shaan invested just<br />
$10,000 of his own money and had a $90,000 mortgage with an interest rate of 8.5 percent. If after three<br />
years he sold the property for $120,000.<br />
1. What is his gross profit?<br />
2. What is his net profit/loss?<br />
3. What is the rate of return on investment?<br />
3. Shelly’s assets include money in the checking and savings accounts, investments in stocks and mutual<br />
funds, personal property, such as furniture, appliances, an automobile, coin collection and jewelry. Shelly<br />
calculates that her total assets are $108,800. Her current unpaid bills, including an auto loan, credit card<br />
balances, and taxes total $16,300. Calculate Shelly’s net worth.<br />
4. Barry and his wife Mary have accumulated over $4 million during their 45 years of marriage. They have<br />
three children and five grandchildren.<br />
<br />
<br />
<br />
How much money can Barry and Mary gift to their children in 2008 without any gift tax liability?<br />
How much money can Barry and Mary gift to their grandchildren?<br />
What is the total amount of estate removed from Barry and Mary’s estate?<br />
5. Dave bought a rental property for $200,000 cash. One year later, he sold it for $240,000.<br />
<br />
<br />
What was the return on his $200,000 investment?<br />
Suppose Dave invested only $20,000 of his own money and borrowed $180,000 (interest free<br />
from his rich father). What was his return on investment?