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# Fin 1610 Mid-term test (Fall 2008): Total 9 pages Please answer all questions.

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b. increase both assets and liabilities. c. increase net worth only. d. increase assets or liabilities only. Abbey had the following information about her charge activities in April: Beginning balance \$900 April 10: purchase Twins concert ticket \$400 April 20: make monthly payment \$800 APR shown on the statement for April 30% Under the average daily balance method including current purchases, Abbey's interest for April will be closest to: a. \$ 22.2. b. \$ 24.2. c. \$ 26.2. d. \$ 28.2. e. \$ 30.2. Joe is making \$40,000 a month. The bank limits the monthly payment of a mortgage to 50% of the monthly income. Suppose the nominal rate of a 30-year mortgage is 6% with monthly payment and monthly compounding. The maximum amount of mortgage that Joe can get from the bank is closest to: a. \$3,340,000. b. \$3,440,000. c. \$3,540,000. d. \$3,640,000. Jane has a debt ratio of 0.25, which tells us that Jane a. is insolvent since the ratio is less than 1.0. b. could have \$10,000 in total assets and \$7,500 in net worth. c. has 25% of his income allocated to reducing debt. d. might have \$2,500 in liquid assets and \$10,000 in current debts. The following two items are from Marcia White's "Dining Out" expense category: (1) January monthly variance = \$25 (favorable); (2) February cumulative variance = -\$10 (unfavorable). If Marcia budgeted \$85 a month for this activity, we know that she a. spent \$60 in January and \$95 in February. b. spent \$60 in January and \$120 in February. c. can bring the activity back within budget by spending \$85 in March. d. has not budgeted properly. Which of the following items would not appear on income statement? a. Jewelry b. Credit card payments c. Rent expense d. Dividends e. Scholarships Which of the following is not a disadvantage of using credit? a. You will have less flexibility with future budgets. b. Credit may lead to overspending. c. There are costs associated with credit. d. When credit is used to purchase an item, your net worth falls by the amount borrowed. Three years ago, Nicole bought a custom- made bookcase to fit in the corner of her apartment. She paid \$1,000 for it. To replace it today would cost \$1,500; however,

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if she had to sell it, she believes she could get only \$700. The appropriate balance sheet amount for the bookcase is a. \$1,000. b. \$1,500. c. \$ 700. d. \$1,200. The cumulative variances in incomes and expenses through November of Mikes budget are \$8,000 and (\$1000), respectively. The budgeted monthly income is \$15,000 and the budgeted monthly expense is \$12,000. The variances in incomes and expenses in December of Mikes budget are \$1,000 and (\$3,000), respectively Assume the budget is the same for all months. The actual saving for the whole year is closest to: a. \$40,000 b. \$41,000 c. \$42,000 d. \$43,000 e. \$44,000

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Basically, if he rents, he will invest the down-payment and savings each month from the lower rent in comparison to the higher mortgage payments. He calculates the future values of his investment at a future date. Then he compares that with the amount of money he will get after selling the house, of which the price will increase at the estimated appreciation rate, and paying back the remaining mortgage. He finds out that buying a flat will give him more money. a. Alex notices that the expected return of investing is higher that the appreciation rate of the flat price. He cannot understand why Allan should put money in a flat with lower expected return than the investment. He asks Michael, an expert in financial planning. Michael gives Alex two reasons. Please explain the two reasons without using any mathematics in 60 words or less. (8 marks) b. Suppose Allan wants to save money but has difficulty. He just spends every dime he has. Which plan (buying or renting) is better? (4 marks) Not included in this years test

Part B (20 questions of 2.5 marks each): Please put your answers in the answer sheet readable by computer. Remember to write down the date and student number. 1. Tina's records show cash balance of \$2,000 while the bank statement shows a balance of \$1,800. The difference is most likely explained by a. unrecorded interest earned on the account. b. deposits made after the statement period. c. checks not cleared during the statement period. d. a statement period less than one month. Adding together all 12-month cumulative income and expense variances should equal a. zero. b. actual savings (or dissavings). c. planned savings (or dissavings). d. the difference between planned saving and actual saving. A grace period on revolving charge accounts a. can eliminate all interest charges if the loan balance is fully paid each month. b. is equal to the time between when an installment payment is missed and the remaining balance on the loan becomes due. c. is the same for all credit cards issued by different companies. d. is usually equal to two billing periods. e. must be one month by law.

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Abbey had the following information about her charge activities in April: Beginning balance \$900 April 10: purchase Twins concert ticket \$400 April 20: make monthly payment \$800 APR shown on the statement for April 30% Under the average daily balance method including current purchases, Abbey's interest for April will be closest to: a. \$ 22.2. b. \$ 24.2. c. \$ 26.2. d. \$ 28.2. e. \$ 30.2. Not included in this years test. Which of the following checks does not guarantee payment? a. A traveler's check b. A certified check c. A cashier's check d. A personal check with a restrictive endorsement Not included in this years test. The "due on sale clause" requires a. the buyer to pay the entire amount due at closing. b. the seller to pay all of the buyers points at closing. c. repayment of the balance on the home loan when the property changes hands. d. the seller to pay all property taxes that have become due between the last tax assessment and the sale of the home. Which does not make owning a home relatively more attractive than renting? a. An increase in the rate of return on financial investments. b. An increase in your marginal tax rate. c. An increase in the expected future price of housing. d. A reduction in mortgage interest rates. e. A reduction of property tax or rates The cumulative variances in incomes and expenses through November of Mikes budget are \$8,000 and (\$1000), respectively. The budgeted monthly income is \$15,000 and the budgeted monthly expense is \$12,000. The variances in incomes and expenses in December of Mikes budget are \$1,000 and (\$3,000), respectively Assume the budget is the same for all months. The actual saving for the whole year is closest to: a. \$30,000 b. \$31,000 c. \$32,000 d. \$33,000 e. \$34,000 Which of the following is not a characteristic of home equity loans (mortgage)? a. They may generate tax-deductible interest payments. b. Repayment may be stretched out over many years. c. The proceeds may be used to finance consumption of consumer goods. d. They carry higher interest rates than consumer loans. Which of the following loans (with same maturities) normally carries the highest interest rate?

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